(THIS IS THE SECOND FILE OF "GLOBALIZATION: THE CONVERGENCE ISSUE" INTO WHICH THIS DOCUMENT IS DIVIDED.)
Edition 16 - April 2008 (Updated 11/1/08 and 1/26/09 and 8/19/11)

CHAPTER 3 ~ THE  CONVERGENCE  PROCESS ~

~ TABLE OF CONTENTS ~

(1) ~ Introduction ~ (In another file)
(1-A) ~ Physics of Globalization ~
(1-B) ~ Historical Background of "Free Trade" ~
(1-C) ~ Current Status of the Globalization Process ~
(1-D) ~ Our Bipolar World - The Context of Globalization ~
(2) ~ Does Globalization Produce Convergence?~ (In another file)
(2-A) ~ Can Non-mobile Factors Prevent Convergence? ~
(2-B) ~ So is there a Faustian Bargain?

~ CHAPTER 3 ~ The Convergence Process ~
(3-A)
~Economic and Social Effects of Trade Deficits (First Chapter in this file)
[3A1]~Employer-sponsored health-care benefits, [3A2]~Retirement benefits, [3A3]~Wages, [3A4]~Hours worked, [3A5]~Returns to work after layoffs, [3A6]~Severance pay, [3A7]~Welfare benefits, [3A8]~Part-time and temporary employment, [3A9]~Savings, debt and bankruptcy, [3A10]~Stress-related issues, [3A11]~Poverty-related issues, [3A12]~Work-force population shifts, [3A13]~Economic polarization, [3A14]~Sustainability issues, [3A15]~Housing, [3A16]~Dropping Out, [3A17]~The Deflation/ Inflation Vise, [3A18]~Jobs, [3A19]~Financial Capital, [3A20]~A Caste System for the Developed World?, [3A21]~The lag between US labor productivity and US wages, ~
(3-B)~Effects of Trade Deficits on the US Economy ~
(3-C)~Policies for Dealing with Globalization ~
[3C1]~Protectionism, [3C2]~Semi-Protectionism, [3C3]~Labor/ Environmental Standards, [3C4]~Convergence, [3C5]~Hindsight

~ CHAPTER 4 ~ Effects of, and Responses to, Convergence ~
(4-A)~The Subsistence-Level Labor Pool Constraint on Real Wages ~
(4-B)~
Some Optimistic Studies ~
[4B1]~A World Bank Study, [4B2]~A Harvard University Study, [4B3]~Intrinsic Biases in Studies of Globalization Economics,
[4B4]~Escapes from Extreme Poverty, [4B5]~A Rand Study,
(4-C)~Some Case Histories of the Links between Globalization and Economic Growth
[4C1]~The Arab World, [4C2]~Viet Nam, [4C3]~China, [4C4]~Chile, [4C5]~Ethiopia, [4C6]~India, [4C7]~Russia, [4C8]~Southeast and Eastern Asia, [4C9]~Latin America, [4C10]~Japan's Experience in Resisting Globalization, [4C11]~The EU Experience with Globalization, [4C12]~ The Developing World's Experience with Globalization, [4C13]~The 50 Least Developed Countries, [4C14]~Cambodia, [4C15]~South Korea's Experience with Globalization, [4C16]~Conclusions, ~
(4-D)~Some non-Optimistic Studies ~
[4D1]~The Clark-Mander Study, [4D2]~The Weisbrot et al Study, [4D3]~A Recent IMF Study, [4D4]~The Milanovic Study, [4D5]~An Emerging Picture ~
(4-E)~The Out-Sourcing-In-Sourcing Debate ~
(4-F)~
Blaming Globalization or Blaming its Context - And Does it Matter? ~ (Last section of this file)

(5) ~ Financial Capital Constraints on Convergence (Top of the third file of this document) ~
(5-A)~ The Role of Population Growth Rates ~
(5-B)~ Cost/ Time Frame for Reducing the Developing World's Financial Capital Problem ~
(5-C)~ The Role of Capital-Intensive Agriculture ~
(5-D)~ Capital-Intensive Agriculture: A Route to Developed World Status? ~
(5-E)~ The Role of Foreign Investments, Loans and Development Aid ~
(6)~ Natural Capital Constraints on Convergence ~
(6-A)~ Footprint Analyses ~
(6-B)~ Net Primary Production Analyses ~
(6-C)~ Neglected Issues ~
(7)~ The Convergence Point ~
(8)~ Strategies for Living with Globalization
~
(8-A)~ The Threats Posed by Deflation ~
(8-B)~ Capital Utilization Efficiency ~ A Partial Cure for the Ills of Globalization ~
(8-C)~ Natural Capital Utilization Efficiency and Conservation ~ Another Partial Cure ~
(8-D)~ Reducing Population Growth ~ The Crucial Issue ~
(8-E)~ The Time-Frame Issue ~
(8-F)~ Demographic Bonus Investment Options, ~
(8-G)~ Other Strategies ~
(8-H)~ The Limited Potential of Available Options ~
(9) ~ Politics of Globalization - déjà vu ~
(9-A)~ Old Rules and New Rules,
(9-B)~ The New Environment
(9-C)~ Polls

~ List of Tables found in this second file (Chapters 3 and 4): ~
(3A-1)~Percentage of Firms with more than 200 Employees that Offer Retiree Health Benefits ~
(3A-2)~Magnitude of Pension Plan Deficits ~
(3A-3)~Degree to which Single-Employer Pension Plans are Under-Funded ~
(3A-4)~Percentage of Working-Age Households that are at risk of being unable to maintain their Pre-Retirement Standards of Living in Retirement, by Age and Income ~
(3A-5)~Effect of Educational Attainment on U.S. Wages and Wage Growth ~
(3A-6)~Credit Card Delinquencies as a percent of Total Loans ~
(3A-7)~Comparison of Median Household Debt Outstanding to Median Household Income ~
(3A-8)~New Jobs Created in Various Pay Ranges ~
(3A-9)~The Premium Employers pay for workers with 4-year College Degrees over those with High School Degrees ~
(3A-10)~Assets under Management by Hedge Funds in the U.S. ~

(4-1)~Some Constraints Hindering Convergence at Developed-world Standards of Living ~
(4C-1)~Monthly wages in Japan and China ~
(4C-2)~The Informal Economy as a Percent of the Official GDP in 1999-2000 ~
(4D-1)~Some Key Changes in Global Social/ Economic Indicators, 1960-2000 ~

~ List of Tables found in the third file (Chapter 5-9): ~
(8D-1)~Effect of Population growth rate on the probably of civil conflict ~

Go to Home Page of this Website ~

Huge global gradients in labor prices, the cause of ever-increasing trade deficits (Table (1C-7)), have put pressures on developed-world labor to accept reductions in wages and benefits. (See Ref. (08S1) Section (G-1).) These pressures are spawning economic and social effects far outside the workplace. Data on 21 categories of these effects are given below (Section (3-A)). Large and rapidly increasing trade deficits also pose risks to the US economy as a whole (Section (3-B)). Strategies for reducing these risks need to be considered (Section (3-C)).

SECTION (3-A)~ ECONOMIC AND SOCIAL EFFECTS OF TRADE DEFICITS ~ [3A1]~Employer-sponsored health-care benefits, [3A2]~Retirement benefits, [3A3]~Wages, [3A4]~Hours worked, [3A5]~Returns to work after layoffs, [3A6]~Severance pay, [3A7]~Welfare and Unemployment benefits, [3A8]~Part-time and temporary employment, [3A9]~Savings, debt and bankruptcy, [3A10]~Stress-related issues, [3A11]~Poverty-related issues, [3A12]~Work-force population shifts, [3A13]~Economic polarization, [3A14]~Sustainability issues, [3A15]~Housing, [3A16]~Dropping Out, [3A17]~The Deflation/ Inflation Vise, [3A18]~Jobs, [3A19]~Financial Capital, [3A20]~A Caste System for the Developed World?, [3A21]~The lag between US labor productivity and US wages,

This section deals with the effects of trade deficits on those who supply labor, human capital and financial capital to the developed world economy. A subsequent section (3-B) deals with the effects of trade deficits on the overall US economy. These effects also affect the personal lives of us all, but in a macro-sense. Keep in mind that the US has not been competitive in world trade since 1976. The US international trade deficit in 2008 was 35% larger than Social Security spending, 50% larger than all of US defense spending, and 2.5 times larger than Medicare spending (08H1).   (This is unlike the EU and Japan - that have managed to remain competitive, but with ever-increasing difficulty in recent years.) This puts the US in a precarious position because it is impossible for any nation to increase their current accounts deficit indefinitely. Section (3-B) gives reasons to believe that this state of affairs cannot go on much longer. When the US finally is forced to face up to its long-term fiscal mismanagement and its trade policy mismanagement, the only possible result is a significant worsening of the ills noted below. Also note that more than half of US goods trade currently takes place with other industrialized countries where wages are more comparable (04K3). The trend however is for the US to alter its mix of trading partners toward countries with lower wages. While Canada remains the largest trading partner with the US in terms of goods exported and imported, Mexico assumed the second-place ranking as of 1999, displacing Japan and its highly paid labor from that position. US trade with China has also grown dramatically, from less than 1% of US goods imports in 1980 to 11% in 2002, exceeding goods imports from Japan for the first time (04K3). Also note that the US is starting to run trade deficits in agricultural commodities despite heavy US government subsidies and despite sub-minimum wages for US farm labor. The US has also run trade deficits in forest products since 1914 and fish for decades despite heavy government subsidies for both industries. Since the world's forests are being heavily over-cut, and the world's fisheries are heavily over-fished, the US trade deficits in these two basic commodities (plus oil) seem destined to grow much larger in the decades to come as reserves dwindle and prices escalate. So the future of the US trade deficit is bleaker than most people would surmise. So avoid linear extrapolations of the US ills noted below into the future. Doing so could hardly do anything but grossly underestimate the future ill effects of globalization. On the other hand, Chapter 8 addresses the issue of "living with globalization," i.e. how the impacts of globalization on us all might be lessened, and how the really severe, more precipitous effects might possibly be avoided.

Part [3A1]~ Employer-Sponsored Health-care Benefits ~

Table (3A-1)~Percentage of firms with more than 200 employees that offer retiree health benefits (from a graph) (David Wessel, Ellen E. Schultz, Laurie McGinley, "Pension Curb Accelerates Broad Corporate Shift on Worker Guarantees," Wall Street Journal (2/8/06) p. A1.)

Year

1988

1991

1995

1998

2001

2003

2005

Percent

67

47

40

40

38

39

33

Kaiser/ HRET; KMPG; Health Insurance Association of America

Part [3A2]~ Retirement Benefits ~
Percent of all new jobs in the US offered pension benefits: 23% in 1979 vs. 15% in 1993 (93Z2).

Table (3A-2)~Magnitude of Pension Plan Deficits (05G1)
Row 1: Number of corporations reporting deficits in their pension plans in excess of $50 million.
Row 2: Aggregate deficit in these pension plans (in billions of US$).

Year

2000

2001

2002

2003

2004

Number of Deficit Pension Plans

50

80

261

365

385

Aggregate Deficit of these Plans

18

20

111

306

270

Table (3A-3)~Degree to which single-employer pension plans are under-funded (Source: The Pension Benefit Guaranty Corporation) (From a chart in Pittsburgh Post Gazette (8/15/05), p. A8) (in billions of US$).

Year

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Amount

15

20

30

55

85

60

100

105

40

400

450+

Table (3A-4)~Percentage of working-age households at risk of being unable to maintain their pre-retirement standard of living in retirement, by age and income (from a chart prepared by Retirement Research at Boston College) (06R1)

Birth Years

1946-1954

1955-1964

1965-1972

Income

Top
33%

Middle
33%

Bottom
33%

Top
33%

Middle
33%

Bottom
33%

Top
33%

Middle
33%

Bottom
33%

% at risk

33%

28%

44%

35%

43%

53%

42%

45%

60%

The tendency of younger workers to have more problems is attributed to (declining) rates of personal savings, changes (mainly reductions or eliminations) in employer pension plans, and changes in social security in recent decades (06R1).

Part [3A3]~ Wages ~

Table (3A-5)~Effect of Educational attainment on US wages and wage growth (Wage changes are inflation-corrected.) ("Some college" includes associate degrees.) (06W4)

Education
Achievement

% of Total
Employment

Ave. Wages
in 2005 ($)

% Change
(2000-2005)

Non-High School Graduate

9.9%

22,374

- 4.6%

High School Graduate

29.8%

31,665

- 0.2%

Some College

27.9%

38,009

- 2.5%

College graduate

21.1%

56,740

- 3.1%

Master's degree

7.9%

68,302

- 1.8%

Ph. D.

1.5%

93,593

+ 2.9%

M.B.A., J.D., M.D.

1.9%

119,343

+10.6%

Note: The data above include only cash wages, not health benefits, pensions, stock options, etc.

Part [3A4]~ Hours Worked ~

Part [3A5]~ Returning to Work After Layoffs ~
Only 15% of workers displaced in the recession just prior to 1993 expected to return to their former jobs, vs. 44% in four previous recessions (93Z2).

Part [3A6]~ Severance Pay ~

Part [3A7]~ Welfare and Unemployment Benefits ~

Part [3A8]~ Part-Time and Temporary Employment ~

Almost 10% of US workers are in an alternative or flexible work arrangement (independent contractors, on-call workers, temporary-help agency workers, and workers employed by contract firms). If self-employed individuals and those working part-time are also included, about 25% of US workers are in a "nonstandard work arrangement" (03W2) (04K3). Many analysts predict that the number of workers in nonstandard work arrangements will increase (02N1). The data above support this view. Part-time employees, whether in nonstandard or standard employment relationships, typically do not qualify for health insurance and pensions, and are less likely to receive company-sponsored training to update their skills. Even full-time workers in nonstandard arrangements are less likely to receive these benefits (03W2) (04K3).

Part [3A9]~ Savings, Debt and Bankruptcies ~

Year ~

1970

1974

1978

1982

1986

1990

1994

1998

2000

Savings

10.0

11.0

9.0

11.0

9.0

7.5

6.0

4.0

0.0

Year

1980

1985

1990

1995

2000

2005

2008

%

67

70

83

89

95

127

129

Year

1988

1990

1992

1994

1996

1998

2000

2002

2004

Delinquencies

2.5

2.6

2.8

3.0

3.2

3.4

3.6

4.0

4.5

Table (3A-7)~Comparison of Median Household Debt Outstanding to Median Household Income

Year

1990

1992

1994

1996

1998

2000

2002

2004

Median Debt

56,000

61,000

60,000

62,000

68,000

78,000

86,000

101,000

Median Income

36,000

35,000

35,000

37,000

40,000

41,000

40,000

41,000

(Figures are in 2000 dollars) (Source: Economy.com) (05D1) (from a plot)

Part [3A10]~Stress-Related Issues ~

The effects of growing job-related stresses extend well beyond growing numbers of types of rage and growing numbers of incidents of each type of rage. Candidates for public office have found that mindless attack ads are an excellent way to win elections. These ads also help candidates avoid substantive discussions of substantive issues. Even fundamentalist churches, televangelists, and talk show hosts are discovering that hate-mongering is a great way to fill pews, increase donations, and increase media ratings. People now have hate lists, and if you examine these lists it becomes clear that they came from church sermons and Sunday school classes. In decades past this was unheard of. Public participation in social clubs, civic organizations, and similar organizations is dwindling as people discover themselves required to devote ever-increasing amounts of time to their jobs. All this paints a picture of weakening social fabric, loss of national cohesiveness, and societal disintegration.

Part [3A11]~Poverty-Related Issues ~

Part [3A12]~Work-Force Population Shifts ~

Table (3A-8) ~ New Jobs Created in Various Pay Ranges (expressed as a percentage of total job-creation) (Low wage level is under $7400/ year; medium wage level is $7400-$29,600/ year; high wage level is more than $29,600.) (All figures are in constant 1986 dollars.)

Year Range

1963-73

1973-79

1979-85

Low-Wage

20

20

43

Medium Wage

33

64

46

High Wage

47

16

11

Part [3A13]~ Economic Polarization ~
NOTE 1: Economist Lester Thurow also attributes the rising inequality in the distribution of earnings in the US to a rising proportion of female workers (87T1) (See "Hours Worked").

NOTE 2: Lower-wage workers tend to compete more directly with developing world labor.

Federal Reserve Board data show growing disparities in income (87T1):

Table (3A-9)~The Premium employers pay for workers with 4-year college degrees over those with high-school diplomas (in percent) (from a graph)

Year

1973

1975

1980

1985

1990

1995

2000

2003

Women

36

33

26

33

42

46

47

46

Men

25

26

21

30

35

37

42

41

Source: Economic Policy Institute (04W1)

Karoly and Panis (04K3) have discussed the issue of economic polarization at considerable length and discussed some of the arguments found in the literature as to underlying causes. They seem to conclude that mainly increasing degrees of computerization have driven the price of college graduate labor upward to a far greater degree than the price of high school graduate labor. They also appear to imply that globalization has had little effect on the price of labor - only minor sectoral shifts upward and downward with the net of all effects being positive. All this seems extremely far-fetched, given the large mass of data given in this Section (3-A) and elsewhere in this document.

The more recent data on wages (See above) show that only the wages of PhDs, MBAs, JDs and MDs have beat inflation during 2000-2005. Benefits have beat inflation, probably due mainly to exploding health care insurance premiums. Employers are dropping health insurance but probably mainly for lesser-skilled labor simply because the pressures of foreign competition lets employers get away with it to a greater extent than for more highly paid labor which does not (yet) compete as directly with developing world labor. Average US labor wages and benefits since 1980 have tracked below productivity growth (See Section (3-A) [A21] below.). Prior to 1980, wages and benefits have tracked productivity very well for many decades. The overwhelming bulk of computerization has been in software like word-processing, spreadsheets, reservation systems, bookkeeping, billing, and a wide variety of other basically bean-counting software programs that virtually all high school graduates can (and do) handle. Data-entry comprises a large portion of computer-related labor, and this does (should) not even require a high school diploma. Writing computer software does not require a college education. (The fields of software programming and software engineering are now plagued with high levels of unemployment as a result of globalization-based competition.) In most business settings, computers are called upon to do far less than what they are capable of. So the ability to work with computers in business settings probably varies little over the full range from high-school-level labor to college-level labor. In the huge health care industry with large numbers of highly skilled workers, computers do very little beyond basic bean-counting, mainly because of extreme software incompatibility problems that result when hundreds (about 300) of health-care software companies can see no reason why their software ought to be compatible with the software of competitors.

Karoly and Panis (04K3) appear to virtually ignore the millions of manufacturing jobs (mainly high school level labor) that have gone overseas in the past few decades, the strong downward trend of inflation-adjusted minimum wages, strong declines of union membership in recent decades, elimination of benefits for mainly less-skilled labor, reductions of employer contributions to pension funds, rapidly increasing rates of immigration (mainly lesser-skilled labor), large-scale increases of the number of women entering the labor force (labor biased toward lesser-skilled jobs), and increasing use of "non-standard" work arrangements (which typically wind up eliminating health care benefits, pension benefits and skills training) for lesser-skilled labor simply because the pressures of globalization-based competition let employers get away with it.

Part [3A14]~ Sustainability Issues ~
Michael Milken attributes the unusual US complacency over stagnating, or falling, wages over the past quarter-century to:

But he notes that none of these trends are sustainable (00M1). Milken neglects the fact that US fertilities have dropped significantly since around 1970, reducing living expenses for wage earners. However this trend, also, is non-sustainable, and thus also the complacency. Consider:

The bottom half of the US economy (the half with wages falling the fastest) can thus expect to see their financial assets becoming even more negative and, upon retirement, can expect their net worth to fall below $20,000 while their average debt continues to double every few years. Complacency may be shorter-lived than some people think.

Part [3A15]~ Housing ~

A $1 billion ad campaign run by Citicorp from 2001-2006 urged Citicorp customers to take out "home equity loans" (previously called "second mortgages.") Such loans were once considered to be the borrowing of last resort, to be avoided by all but people in dire financial straits. Since the early 1980s, the total value of home equity loans outstanding increased from $1 billion in 1982 to $100 billion in 1988 to more than $1 trillion in 2008. Nearly 25% of Americans with first mortgages have them. Part of the reason for this was that portions of home equity loans were tax-deductible (08S7). In mid 2008, the portion of people who have home equity loans more than 30 days past due is 55% above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45% higher (2008) (08S7). For the first time since WWII, the portion of home value that Americans own (in 2008) has fallen to less than 50%. In the 1980s, that portion was 70% (08S7). The cause of this huge transformation in indebtedness began in the 1970s and early 1980s when federal laws were changed to allow mainstream banks to offer second mortgages as well as loans with interest only, adjustable rates and so-called piggyback features combining first and second mortgages. Prior to that time, such products were marketed primarily to lower-income customers by savings and loan companies and financing companies such as Beneficial and Household Finance (08S7). All this is just another example of the ever-growing indebtedness of Americans as they struggle to deal with declining real wages that globalization is imposing upon them as the wage scales in the developed and developing world converge.

Part [3A16]~ Dropping Out ~
In 2002, 1.1 million US men and women between ages 25 and 54 described themselves as "retired"(9/2003 study by Bureau of Labor Statistics). In 1991, 330,000 in the same age group described themselves as "retired" (04H1).

In August of 2006, nearly 5 years after the end of the last recession, the share of the population at work (the employment rate) is 1.7 percentage points below its peak in April 2000, indicating that millions of potential workers have dropped out of the labor force completely and thus are no longer counted as unemployed. A recent study by Uchitelle and Leonhardt found that about 13% of prime-age (ages 35-55) American men are not working - more than double the percentage during the 1950s and 1960s - and most of them have quite looking for jobs (New York Times Editorial of 8/8/06).

Part [3A17]~ The Deflation/ Inflation Vise ~
The degradation in wages and benefits documented above suggests a significant risk of deflation. This would result in the need to print money in order to avoid massive default on loans. But this would produce major risks in terms of US creditors pulling their money out of the US (See Section (3-B) below.) At the same time, rapidly increasing prices in such commodities such as soybeans, cement, metals and oil (See Chapter 4) are being attributed to growth in demand from nations like China. China and India together have 2.5 billion people, slightly over 50% in China. China consumes nearly 33% of the world's rice production, over 25% of the world's steel production and nearly 50% of its cement production. Oil consumption has doubled in India since 1992, while China went from near oil-self-sufficiency in the mid-1990s to becoming the world's second largest oil importer in 2004 (06U1). Since the start of 2003 through mid-2006, the bid-price for 3-month nickel futures contracts on the London Metal Exchange roughly tripled, from about $8000/ metric tonne to $25,000/ metric tonne (06B2). Oil prices also roughly tripled during this 3.5-year period.

If the number of Chinese and other developing world folk involved in producing for export (or internal consumption by export producers) doubles or triples (easily possible) commodity price inflation could spiral out of control. The deflation/ inflation mix might reduce the risks of US creditors pulling their money out, but it would catch US labor in a terrible bind of wage deflation/ commodity price inflation. This might offer one mechanism by which living standards of US labor might be reduced by 90% or so to bring them into synch with developed world labor. However it would create terrible political/ economic instability problems. Lesser political/ economic instability problems produced WWII in Europe.

In recent years there have been four consecutive grain harvest shortfalls, each larger than the one before. The grain shortfall of 105 million tons in 2003 was the largest on record-5% of annual world consumption of 1930 million tons. The world's carryover stocks of grain are now at their lowest level in 30 years - 59 days of consumption. (70 days is the minimum considered necessary for food security.) Wheat and corn prices are at 7-year highs. Rice prices are at 5-year highs. (See supporting data in http://www.earth-policy.org/Updates/Update40_data.htm) Farmers, fishers and consumers have had to deal with numerous worsening trends: falling water tables, reallocation of water supplies to urban uses, urbanization of croplands, rising temperatures, spreading deserts, reduced dam backwater capacity per capita, population growth, depletion of wild fisheries and increasing food demands from nations like China. If these trends cannot be overcome, food prices must trend ever higher. The effects on world trade are growing increasingly evident. In the past few years, Canada, Australia, the EU and Russia have imposed constraints on food exports. (See recent articles by Lester Brown of the Earth Policy Institute.) The rules of globalization tend increasingly to forbid constraints on exports. Developing world folk, who spend far larger fractions of their income on food than developed world folk, are destined to become even more wretched as a result of these trends.

Part [3A18]~ Jobs ~
From 2000 to 2003, employment by US multi-nationals rose by 193,000, or 2.4%, at their foreign affiliates. During the same period, US employment by American multi-nationals declined by 2.2 million, or 9.1%, to 21.7 million (05H1). Capital spending by US multi-nationals has also been declining in the US and increasing abroad (05H1).

Since the 1960s, the number of women in the work force has been increasing. Since around 2000 that number has been declining (Bureau of Labor Statistics data) (08U1). It was found that this is not a matter of choice (e.g. to raise children) but a matter of economics. Women are being afflicted on a large scale by the same problems as men: downturns, layoffs, outsourcing, stagnant wages or outright pay cuts (08U1). Women have tended to bring home about a third of family income, and only those families with a working wife have seen real improvement in their living standards. The proportion of women holding jobs in their prime working years (25-54) peaked at 74.9% in early 2000. (72.7% in June 2008) (08U1). The pattern is roughly similar among the well-educated and the less-well-educated, among the married- and never-married, among mothers with teenaged children and those with children under age 6, and among white women and black women. Some 96% of men held jobs in 1953, their peak year (86.4% in 2008) (08U1). The biggest retreat has been in manufacturing, where more than one million women have disappeared from payrolls since the year 2001. Median pay for women aged 25-54 was $15.04/ hour in 2004 and $14.84/ hour in 2007 (inflation-adjusted) (Economic Policy Institute data). The corresponding wages for men today are about $2/ hour more (08U1).

Part [3A19]~ Financial Capital ~
The sum total of all the effects noted above cannot possibly affect only those who provide labor and human capital to the GDP. One would think, intuitively, that there ought to be spillover effects to the other segments of the developed world’s economy. These spillover effects are now becoming increasingly apparent, at least in terms of the spillover effects on providers of financial capital and on providers of natural resources to the GDP. This Part [3A19] is limited to spillover effects on providers of financial capital. Articles in the Wall Street Journal (05I1) (06L2) (06P3) and the New York Times (05A4) (06U3) provide thorough analyses of these effects, although these articles make no connection between these effects and globalization. Since President G.W. Bush took office, the combination of rising labor productivity and stagnant or declining earnings (due to competition from developing world labor) has led to a veritable profit gusher (due in part to buying goods produced by developing world labor and selling those same goods to developed world consumers). One result was corporate profits more than doubling since 2000. In 2006, profits as a share of national income were at the highest level ever recorded (07K1). Non-residential investment (investment other than housing construction) in the US has grown very slowly by historical standards. As a share of GDP, US non-residential investment remains far below its levels of the late 1990s, and has been declining in recent quarters (07K1). Low investment may be one reason why US productivity growth slowed dramatically during 2004-2006 (07K1). The likely reason for this is that, with the earnings of labor stagnant or declining, there is no reason to expand physical capital. But with all that huge corporate profit growth, the owners of financial capital are finding a shortage of investment opportunities and hence very low returns on financial capital for high quality investment opportunities. This has resulted in capital being invested in increasingly risky investments in a desperate attempt to obtain a "reasonable" return on investment. The end-results are becoming increasingly clear. Among them:

(Less and Less to Invest In) The effects documented in Section (3-A) [3A1] – [3A18] and in Section (4-C) [3C11] can hardly avoid reducing the purchasing power of those who provide labor and human capital to the developed world’s GDP. These people form the bulk of the developed world’s consumers. When consumer-spending power drops, the need for additional production- and service facilities drops, and the rate at which financial capital is invested in such facilities must also drop. At the same time as this is happening, corporate profits are near record levels even as personal savings rates (in the US) decline to essentially zero or less. The obvious net result is that owners of ever-increasing amounts of financial capital are experiencing increasing difficulty in finding new investment opportunities. As a result, earnings on invested capital are dropping, and investors are investing ever-increasing amounts of financial capital in high-risk investments in order to achieve apparent returns in excess of the rate of inflation. These effects are documented in the above-mentioned Wall Street Journal articles (05I1) (06L2) (06P3).

Laura Tyson (dean of London Business School) noted in 2007 that, with the emergence of China, India and countries from the former Soviet bloc, corporations in the developed economies of North America, Europe and Japan have more choices on where to invest. That puts them in a stronger bargaining position with workers in their home countries. The result is a "compression" of developed world wages and benefits as a result of the growing number of workers competing for declining numbers of jobs. As a result, an ever-larger share of national income in the U.S., Japan and Western Europe is going to corporate profits. The share that flows to workers is dwindling. This explains why worker anxiety and serious questions about the wisdom of globalization are becoming election issues in the U.S. and throughout the developed world (07W1).

Global pension-, insurance- and mutual fund assets under management increased from $31 trillion in 1998 to $46 trillion in 2004. During the same period, global central bank reserves have doubled to $4 trillion (05I1). Also steep price increases in oil and other commodities have greatly increased the financial wealth of commodity-producing countries. These growing floods of new financial capital into a marketplace with little need for additional financial capital due to stagnant, or declining, consumer purchasing power have translated into:

  1. Money market yields only slightly above the rate of inflation,
  2. Global investors pouring money into risky investments such as emerging countries’ stocks and bonds, real estate, real estate-backed debt, commodity funds, fine art, private equity funds and "derivatives," and
  3. Mutual funds, non-profit institutions and local governments (among others) increasingly adopting hedge-fund tactics (06L2) such as short selling (selling borrowed shares of stock in hopes of profiting from a price decline), buying securities on margin, or with borrowed money, and/or using more complex derivatives, or financial contacts whose value is based on an underlying investment. Such tactics impose both added risks and higher management fees on investors.

(Increasingly Bubbly) This, in turn, results in escalating prices of these kinds of assets and hence rapidly falling returns on investment (as a percent of asset value). Investors are now willing to accept yields on risky ("high yield") corporate bonds and emerging market bonds that are only about 2.5 percentage points above the yields on comparable Treasury securities (05I1). The price: earnings ratio of the S&P500 common stock index is 19 – well above the historical average of 14 (1945-1996) (05I1). The higher the price of risky assets the greater the risk of owning these assets. This is why we so often hear terms like "real-estate bubble." Obviously there are a lot more bubbles around than that one. All this froth comes only a few years after the Internet stock bubble burst, even though the bubbly nature of Internet stocks was widely known long before that bubble burst. A minor downturn in the economy could easily impose huge losses on investors in high-risk-low-return investments.

(Growing Risks in Mortgage-backed Bonds) In order to accommodate the large and growing amounts of financial capital looking for investment opportunities, US lenders have been playing increasingly fast and loose in lending money for home mortgages. In 2005 and 2006, US lenders wrote an estimated $3.2 trillion in new home mortgages (a record). To do this they lowered their credit standards considerably. In 2005, 20% of mortgages taken out were "sub-prime" (made to borrowers with poor credit). Many more mortgages had risky features like low (or no) down-payments, interest-only payments, and ballooning repayment schedules. As interest rates rose in 2006, mortgage delinquency rates and foreclosures soared. Many of these risky (sub-prime) mortgages were bundled into products rated as "AAA" by investment-rating firms with a financial incentive to inflate ratings. These products were then sold to investment bankers who sold them to investors worldwide who had been conned into believing that they were investing in high quality assets. More than 20% of global private debt securities are now tied to housing in the US -- $7.5 trillion – far larger than even the investment in US Treasury securities ($4.3 trillion on 12/31/06) (07E1).

Lewis Ranieri (who helped to create a huge business of selling bonds backed by Americans’ home-loan payments) is worried about the proliferation of risky mortgages and the convoluted ways of financing them. Many sub-prime borrowers bought homes with no down-payment. In 2006, more than 40% of sub-prime borrowers weren’t required to produce pay stubs or other proof of their income and assets (Credit Suisse Group data). Many home-mortgage loans made in 2005 and 2006 were made without the lenders being sure of what the house was worth (07H2). All this took place during a "Bubble" in the housing market during an explosion in home sales that was the main driver in keeping the economy healthy (or apparently healthy). But even then, all sorts of corners had to be cut in order to accommodate the flood of cash looking for homes.

(Hedge Funds) Even pension funds (total assets in 2005: about $9.4 trillion (06S3)) are now being affected (motivated) by the glut of financial capital in the developed world. Growing numbers of pension funds, university endowments, and charitable organizations are investing billions into "hedge funds." These are secretive, lightly regulated investment partnerships with risks that are hard to measure, returns that are hard to predict, and management fees and charges that are some of the highest on Wall Street. In the past they normally managed money only for wealthy investors. Hedge fund managers do not need to give investors specifics about trading activity, and there are no daily updates on the value of investors’ holdings as there are with mutual funds. Hedge funds often take long or short positions on stocks, and invest in "credit derivatives" and commodities (05A4) (06S3). Pension funds and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, vs. $5 billion in 1995. Pension funds account for roughly 40% of all institutional money (05A4). Some pension funds have more than 20% of their assets invested in hedge funds (05A4) (06S3).

Congress has been lobbied heavily for amendments that would make it easier for hedge funds to manage even more pension money without having to comply with the federal law that governs company pensions (05A4) (06S3). The Pension Benefit Guaranty Corporation, a federal agency, covers corporate pension failures – even pension funds invested in highly risky assets. Taxpayers also cover pension failures by state- and local governments (05A4). Long-Term Capital Management, a hedge fund, nearly collapsed in 1998. Bayou Group, a $450 million hedge fund shut down after most of its money disappeared. Its two officers have pleaded guilty to fraud charges (05A4). The net amount of money flowing into hedge funds that focus on emerging-market investments rose from $4.7 billion in 2004 to $5.3 billion in 2005, bringing total assets to $44.5 billion. Pension funds, endowments and other institutional investors such as universities and charitable organizations (06S3) are pouring money into hedge funds – funds that they have been avoiding for years (06P3). (There are nearly 600 Asia-dedicated hedge funds with nearly $100 billion under management, up from 100 funds with $15 billion under management in 2000 (06P3). The current size of the US hedge fund industry is $1.23 trillion (06R4). Between January of 2005 and September of 2006, 2622 new hedge funds opened, but 1071 hedge funds "closed" (06R4).)

Keep in mind that it was not just a matter of too much financial capital pursuing too few investment opportunities that caused the formation of hedge funds and a wide variety of other risky, difficult-to-understand investment vehicles. It was also the ideology in Washington during this period that strongly favored deregulation and less government generally. There was a firm belief that financial markets are "self-correcting" and therefore do not require government regulation. Even the large number of painful "bubbles" in the economic history of the US was somehow unable to shake the bedrock ideology opposing regulation of financial markets. When countless presidents of banks and other financial institutions descended on Washington in recent years to lobby in favor of eliminating laws that restrained the SEC, Fanny-Mae and Freddy Mack from dealing in high-risk investments, they encountered a Congress and a President eager to accommodate them. Today the bulk of the financial institution president-cum-lobbyists are looking for other lines of work, and investors in these financial institutions are wondering what happened to the money they had invested.

Peter Bernstein (age 89) has observed (or dealt with) the Great Depression, the recession of 1958, the bear market of the 1970s, the 1987 crash, the Savings-and-Loan crisis of the late 1980s, and the 2000-2002 bear market following the tech stock bubble. Bernstein claimed that the current (2008) economic situation is worse than all that he has seen since the Great Depression. He believes that it will roil the financial markets into 2009 and beyond. He also contends that today’s serious economic problems and recession were sparked primarily by hedge funds that are both unregulated by the federal government and, in many ways, unregulated by their owners who gave their hedge fund managers a broad set of marching orders (08B3). Bernstein also blamed the serious economic problems of 2008 on the practice of "securitizing" mortgages (defined above).

The $1.7 trillion hedge-fund industry lost $180 billion during August, September, and October 2008. Money managers fear hundreds, or even thousands, of hedge funds could be driven out of business. This creates problems for public pension funds, foundation assets and university endowments that have poured billions of dollars into these private partnerships since they pulled their money out of Internet stocks in 2001 during the collapse in the values of these stocks. Worldwide, the hedge fund industry (which started in 1990) is shrinking for the first time. The number of hedge funds dropped by 217 during August, September, and October 2008 to 10,016 according to Hedge Fund Research. (Total liquidations for the first half of 2008 were 350.) The Massachusetts state pension oversight committee debated in 2008 whether to allow some towns with pension funds smaller that $250 million to invest in hedge funds. However the US House Committee on Oversight and Government Reform met in November 2008 to consider increased regulation of the hedge fund industry. (Louise Story, "Investors Flee as Hedge Funds Woes Deepen," The New York Times (10/23/08))

Table (3A-10) ~Assets under management by Hedge Funds in the U.S. (in billions of dollars) (from a chart) (06M1).

Year

1990

1992

1994

1996

1998

2000

2002

2004

2005

Amount

30

90

170

260

380

460

620

970

1100

(Returning Corporate Assets to Shareholders) Even though corporate America has been piling up cash for some time, business investments in expanding production facilities, modernization, etc.) have not been robust (06U3) since consumer purchasing power has stagnated or declined. Instead of investing in themselves, many corporations are choosing to distribute their cash to shareholders by buying back the company’s own stock. (In the year ending 3/31/06 US corporations spent a record $367 billion in stock buybacks, an extraordinary amount (06U3).) In the second quarter of 2006, large corporations bought back shares at an annualized rate of $464 billion. More than 40% of S&P500 companies reduced their shares outstanding with buybacks in just the second quarter of 2006. Never before has the magnitude of buybacks been at this level (06Y1). The obvious implication of this is that US companies can see no investments in themselves that represent a better use of corporate capital. There is an obvious explanation for all of this. When developing world labor is paid to produce goods to sell to US consumers who earn 10-20 times what developing world labor makes, it becomes easy to make lots of money. But as US consumers grow poorer and less secure, and as they spend more of their income on oil and other natural resources, consumer-spending must drop further, so the need for industrial expansion diminishes even further. As a result, the only good use for profits is on stock buybacks (or huge bonuses to upper-level corporate officials). As the buying power of consumers continues to fall, US companies must eventually (if not already) find themselves in a state of over-capacity. This can hardly produce anything but a self-perpetuating cycle of declining stock prices and further rounds of layoffs.

(Summary) The upshot of all this is that, after corrections are made for inflation and the increasing costs of risk, real rates of return on financial capital have gotten extremely small – possibly even zero or negative. As consumers grow increasingly less flush and "max-out" their huge credit card debts, the rate of return on financial capital can only decrease. All this leaves only the providers of natural resources as the sole beneficiary of globalization. But with shrinking purchasing power of the developed world’s consumers, and with the purchasing power of the developing world’s consumers being dependent on how much the developing world can sell to increasingly impoverished developed world consumers, the position of providers of natural resources can only grow increasingly precarious also. It is tempting to consider the possibility that the economic melt-down of 2008 and beyond will continue indefinitely. Below is the reasoning for this.

As a result of globalization, the providers of labor and human capital to the developing world’s economies found their earnings stagnant, or declining, and falling increasingly behind their rate of "labor-productivity" growth. (Long-term historical records show that wages and benefits have tracked well with labor productivity up until around 1980 – about the time globalization became significant.) Their first response was to conceal their declining living standards by: 

An eighth option then came along in the form of a huge advertising blitz by banks and other mortgage holders that persuaded homeowners to take out any equity they had in their homes (08S7). The blitz was sold using suggestions for spending the proceeds on frivolous "feel-good" purchases. (Previously such "second mortgages" were regarded as high-risk loans taken out only by people in dire circumstances who needed the money for basic needs. The mortgage-holders’ advertising blitz never mentioned the term "second mortgages" and talked only about the alleged benefits to homeowners of "taking out the equity in their homes.") That eighth option for protecting living standards ended tragically in 2008 in the long-anticipated and inevitable bursting of the housing bubble, declining home values, and a blizzard of foreclosures on homes.

At various points along all this "maxing-out" of options, US tax laws were revised to 

These changes in the tax code transferred an increasing share of the tax burden to the providers of labor and human capital to the GNP, and away from the providers of financial capital. In an environment of declining earnings of labor and human capital and exploding corporate earnings to the point of dire shortages of investment opportunities, these tax-law changes were clearly the exact opposite of what should have been changed in the federal tax laws. The question then arises as to what might be the next option for concealing the economic pain of declining real wages and benefits of labor caused by globalization. The answer should be obvious – Nothing. This is the end of the line. All that remains is the inevitable decline of real wages and benefits of labor down to those typical of the developing world. Elsewhere in this document the "convergence point" is estimated to involve a reduction in real developed world earnings of on the order of 60-80%. This would appear to be as close to a perpetual economic meltdown as anyone would care to suggest.

(The cause of, and the options for fixing, the economic meltdown that began in 2008) The most commonly held belief is that the bursting of the housing bubble caused the current economic meltdown. Numerous economic meltdowns over the past half-century or longer have occurred shortly after the bursting of a bubble. Past efforts of governments to eliminate bubbles have failed, and for good reason. Bubbles tend to have causes that created environments favorable to the advent of bubbles. It is far better to address the causes of bubbles and the environments conducive to bubble-formation. The most recent housing bubble is no exception as will be seen below. Consider some examples.

Case-history 1: Around 1987 a painful currency-devaluation began in southeast Asia and spread to Latin America (e.g. Mexico) and to parts of the Asian continent. This was preceded by a huge flux of foreign financial capital into these nations in search of investment opportunities in industries mainly aimed at exporting goods to developed nations. When a hint of over-capacity occurred, foreign investors quickly pulled out their money, precipitating a currency-devaluation spiral. The cause of all this was a globalization-related multi-national trade agreement that required that foreign investors be allowed to remove their invested capital virtually instantly in the interests of "free trade." Some nations (e.g. Chile, China and Vietnam) rejected the trade agreement and, instead put constraints on how fast foreign capital could be withdrawn, and imposed other stability-oriented constraints (as described elsewhere in this document). These nations were conspicuous in their being unaffected by the currency devaluation. In more recent globalization-related trade agreement negotiations, developing nations are refusing to go along with requirements requiring total freedom in moving financial capital into and out of their economies. This is the way to deal with bubbles – avoid environments that are conducive to such bubbles.

Case-history 2: Around 1988 in the US the "savings-and-loan" bubble burst. It cost the taxpayer on the order of $150 billion to recover from the debacle. The environment was the same as today’s – too much financial capital pursuing too few investment opportunities, plus a powerful ideology-based opposition to any form of government deregulation of the financial marketplace. Various interests lobbied hard to persuade Congress and the president to eliminate the government regulation limiting the savings-and-loan industry’s ability to loan money to home-mortgages only. The regulation was eliminated, allowing the S&L industry to lend money for about any purpose, no matter how risky. This totally eliminated the reason why the S&L industry was created in the first place. Unfortunately the deregulation law "forgot" to remove the obligation of the federal government to guarantee all loans made by the S&L industry, thereby causing the taxpayer to be on the hook for even extremely high-risk loans. Such guarantees had the effect of encouraging risky loans by the S&L industry. Addressing such bubbles directly would be impossible. A far better way to avoid such future debacles would be to maintain a regulatory environment that preserve the initial purpose of the S&L industry.

Case-history 3: Around 2001, the "Internet" bubble burst, creating a minor recession in the US. Prior to the bursting, a few guys, some computers and an untested, half-baked, idea could be worth billions of dollars based on the total value of their stock. The environment was the same as today’s – too much financial capital pursuing too few investment opportunities, plus a powerful ideology-based opposition to any form of government deregulation of the financial marketplace. There is no way such a bubble could be outlawed. The best approach to such bubbles would be to change the environment that favors the on-set of such bubbles. Details of such an approach are given below in the analysis of the current economic meltdown.

The analysis above makes it clear that the real cause of the current economic meltdown dates back to well before the bursting of the housing bubble. That bursting of the housing bubble was merely the trigger. Attempts to prevent future occurrences of housing bubbles as a strategy for preventing future economic meltdowns is unlikely to produce the desired effect, and to leave the real cause of the meltdown in a position to produce a long string of future economic meltdowns. The real cause of the economic meltdown was a mis-handling of the process of globalization by the US. Other developed world nations handled the globalization process much better, although they too are now feeling economic pressures to make the same mistakes as those made by the US. One can see this in the gradual evolution of caste systems in the EU, Japan and the US as described below. The EU, Japan and perhaps some other developed world economies of the Far East managed their globalization processes to protect their labor from the falling wages and benefits that globalization tends to produce. They managed to do this in such a way as to also avoid massive, non-sustainable trade deficits and declining currency values. The US provided its suppliers of labor little, if any, protection against ever-declining real wages and benefits that are likely whenever a world with a capital glut globalizes with a world of dire shortages of financial capital. The US also ran up massive, non-sustainable trade- and current accounts deficits plus budget deficits. This has been forcing the US to engage in massive borrowing from the world’s better-managed economies. The US also let the value of its currency decline without any apparent lower limit. This significantly increases the risks incurred by external sources in making loans to the US. This, in turn, increases the risk of a major economic meltdown in the US, as described elsewhere in this document.

The results of all this should be clear from the analysis above. Declining real wages and benefits of labor (i.e. declining consumer purchasing power) in a period of ballooning corporate earnings produced a shortage of investment opportunities, very low interest rates and a willingness of investors to invest in increasingly high risk ventures, hedge funds, complex investment instruments, sub-prime mortgages and all manner of what would normally be considered to be foolhardy ventures by those desperate to earn positive real rates of return on their investments. The same process was at work in the debacle of the savings-and-loan meltdown back in the late 1980s as noted above. Today’s meltdown will certainly be more severe because the globalization process has grown to be a far larger element of the global economy. Today’s economic meltdown will also have been made worse as a result of several ill-advised changes in the federal tax code. These changes transferred an increasing share of the total tax burden onto labor (already suffering from declining wages and benefits) and away from the owners of capital (already enjoying a glut of earnings) as outlined above.

How should the US proceed to protect itself against future economic meltdowns? The most obvious fix would be to correct all those policy errors that got us into this mess in the first place. Recall: Declining real wages and benefits of labor during a period of ballooning corporate earnings (a fallout of the way the US mis-managed globalization) produced a shortage of investment opportunities, very low interest rates and a willingness of investors to invest in increasingly high risk ventures, hedge funds, complex investment instruments, sub-prime mortgages and all manner of what would normally be considered to be foolhardy ventures by those desperate to earn good real rates of return on their investments. The housing bubble was just one outcome of this desperate search for good rates of return on investments. It just happened to be the trigger that precipitated the economic meltdown that the US now finds itself sinking ever deeper into. Compounding the error, several federal tax policy changes (described above) over the past decade or more transferred the tax burden increasingly onto those who supply labor to the US economy (those who are suffering from globalization) and away from those who supply financial capital (those who are benefiting from globalization). Even worse, all those multi-hundred-billion-dollar economic bailout schemes we keep hearing about tend to transfer federal funds directly to those who supply financial capital to the US economy and only indirectly (if at all) to those who supply labor. It is interesting to note that all of these policy blunders just happened to fit comfortably within the ideology of the political party in power in Washington at the time. With this background in mind it is not hard to figure out how to protect the US from future economic meltdowns. Simply reverse the policies that got us into trouble in the first place. Those reversals are:

The levels of economic activity would increase as a result of greater consumer spending power. This, along with the decrease in corporate earnings toward more typical values, would eliminate much of the financial capital glut that has forced interest rates to decline to extremely low levels. Higher interest rates would reduce the number of people interested in (or capable of) entering the housing market. The result of this would be the prevention of the housing bubble, and hence the prevention of the economic meltdown that is doing so much economic damage and causing so much economic pain. Those who provide financial capital to the GNP would benefit by not suffer from the extreme drops in prices of stocks and other investments that accompany virtually any bubble-bursting process. The evolution of a caste system (described below) would be halted as the huge gradients in wealth are reduced to more sustainable values, and the US would become much more of a "land of opportunity" than it is now becoming.

How should the US economy rescue itself from the current economic meltdown? This question is harder to answer given the extreme amount of economic damage that has already been done, and continues to be done virtually daily via numerous all-too apparent positive-feedback loops. The best answer is probably to use the same process described above for protecting the US against future economic meltdowns. Do not forget the new context of this issue as described above. We have now "maxed-out" all the options we had for protecting ourselves against the economic degradation that globalization would otherwise have heaped on us. We have put our spouses into the labor market; we are working longer hours; we are enduring a more stressful workplace environment; we have "maxed-out" an increasing number of credit cards; we have sold off whatever equity we may have built up in our homes. There is nothing left but to submit to a virtually endless series of cuts in wages and benefits that are inherent in the convergence process described elsewhere in this document. This, in itself, could increase the already huge profits of multi-national corporations and further diminish the purchasing power of American consumers even further. This would make us even more susceptible to risks like housing bubbles as interest rates, the value of the dollar, and the willingness of foreign nations to lend money to the US all plummet. Also keep in mind that the current situation is more dangerous than most people realize. Positive feedback loops are abundant, and produce lots of downward economic spirals that feed upon themselves rather than correcting themselves. The response to such a situation is to act rapidly with whatever recovery strategy is decided upon. Also note that even small perturbations can reverse such spirals, so recovery could be rapid once we figure out what perturbations to invoke. Once a bit of confidence comes along, all that money that banks and investors are sitting on will pour out in the form of loans and investments in stocks, bonds, etc. People will jump back into the housing market that starts behaving like it has bottomed out. Employers will find that access to financial capital has gotten a lot easier, and make plans for expansion. After all, the US has every ingredient it needs to become a dynamic economy except one – confidence. Just reversing a few of the massive policy blunders of the past decade or so could easily perturb the system sufficiently to reverse the direction of all those spirals.

Part [3A20]~ A Caste System for the Developed World? ~
India is noted for its caste system in which everyone is divided into "castes" from which social norms make escape impossible, regardless of what you do, or what talents you have. Also, as a backup, the system is set up so as to insure you never accumulate enough capital to change castes even if the social norms suffer a few lapses. Also, if you somehow accumulate assets and education beyond that typical of your class, you and your family could be slaughtered by a group from a higher caste (See a Wall Street Journal sometime during March of 2008.). In an analysis of the "informal" economy of the developing world (08S1) it was noted that policies and procedures have been (and are being) established to prevent those in the "informal" economy from ever becoming part of the "formal" economy, suggesting the early stages of a caste system. If one examines the EU, Japan, the UK, and the US (08S1), one cannot help but notice the beginnings of a developed-world caste system. All the early stages of the caste systems in these developed nations show striking similarities, suggesting a common origin. This suggests that these caste systems have their origins in globalization. An analysis of this caste system issue for both the developed world and the developing world is given in detail in Section (G1) of Ref. (08S1) so it will not be repeated here.

Part [3A21]~ The lag between US labor productivity and US wages ~
As noted in Section (2-A) [A2], prior to 1980, a close correlation between wages and labor productivity in the US existed for many decades. A portion of this correlation can be seen in Table (2A-7). But since around 1980, US wages have been falling increasingly behind productivities. Extrapolating the trend to 2002 would suggest that US wages in 2002 were about 24% behind productivity. Labor productivity in the US rose steadily during 2003-2006, but the median inflation-correct wage declined 2% during that period. Between 2000 and 2005, labor productivity rose 16.6% but median total compensation for workers rose 7.2% (06G2). After a long period in which it seemed that the information revolution (computers, etc.) was having no impact on (labor) productivity, an acceleration of the annual rate of US labor productivity increase began in 1995 and was not slowed by the post-2000 economic downturn (04K3). Data on trends in the earnings of US labor do not appear to show any acceleration during the period between 1995 and the present. Thus the extrapolation noted above showing US wages lagging behind productivity trends by about 24% in 2002 could be a significant under-estimate, i.e. the actual lag could be significantly greater. Stephen Roach, chief economist at Morgan Stanley, notes that in the past decade, real labor incomes have grown at roughly half of the rate of labor productivity (07W1). This suggests a continuation of the trend that began around 1980.

SECTION (3-B)~ EFFECTS OF TRADE DEFICITS ON THE U. S. ECONOMY ~
The net foreign indebtedness of the US in mid-2005 was more than 25% of the US GDP. At the current pace it will reach 50% of GDP in 4-5 years (05G2). The U.S. net indebtedness at the end of 2005 was a record $2.69 trillion, a 14% increase over 2004 (06P2). In 1980 the rest of the world was indebted to the US by about $0.3 trillion. The net foreign indebtedness of the US was zero around 1985 and has been increasing since then. At the end of 2005, total US foreign debt was $13.6 trillion (about $119,000/ household). Net foreign debt (which excludes the $11.1 trillion in US-owed foreign assets) was therefore $2.5 trillion (06W3). This amounts to 20% of the US GDP (vs. 15% for the 12-nation Euro zone, 17% for the UK, and 44% for Mexico). These debts, plus the rapid pace of US accumulation of new debt, plus rising interest rates, could lead to a vicious cycle of increasing borrowing causing (and being caused by) increasing interest rates. The situation could get out of hand quickly (06W3).

The 2004 US current account deficit (the broadest measure of the trade imbalance) hit a record of $666 billion (6.3% of the GDP) (vs. 4.8% in 2003). The (2005?) US current account deficit was 6.5% of the US GDP, and the US spent considerably more than it saved. In fact, the US was absorbing roughly 70% of the world's external savings (06R3). This fact alone tells us that the US current account deficit cannot go on doubling for much longer without encountering serious problems. For the first time in at least 90 years, the US is paying noticeably more to its foreign creditors than it receives from its investments abroad (06W3). (That gap was $2.5 billion in the second quarter of 2006 (06W3).) A study by Catherine L. Mann (Institute For International Economics) examined Canada, Australia, Finland and seven other economically advanced nations that experienced large current account deficits during the past two decades. On average, the current-account deficit was found to hit its limit at 4.2% of GDP. Deutsche Bank Research warned that capital flows into the US could dry up, causing the US dollar to drop, interest rates to increase, and stock markets to dive. A sustained drop in US stock markets could precipitate a downward spiral of these events. The scenario seems similar to the events during the financial distress of the early 1990s (00P1). Whether 4.2% is the critical point or not, it hardly matters, because the US current account deficit has been growing rapidly (Table (1C-8)), while the US GDP grows much slower. If the actual limit is 7 or 9% of GDP, simple extrapolation suggests that this limit is only a few years away.

Former Federal Reserve Chairman Alan Greenspan has intimated that the US can't expand its current account deficit borrowing forever. In the nightmare scenario, foreigners would react to the out-of-control current-account deficit by pulling their money out, causing the dollar to sink and stock markets to plunge. Americans would have to pay higher interest rates (and higher oil prices) at the worst possible time, and the US economy could lurch to a halt (Wall Street Journal (4/22/02)). Although this view seems to be widely held among economists, there is a holdout. John Taylor, the Treasury Department's undersecretary for International Affairs, says the current-account deficit "is reflective of good investment opportunities in the US, and the effects on financial markets are not a concern" (02P1). One might suspect that this view is forced by the fact that the more widespread view would conflict with the Bush administration trade policy. The Taylor statement really just begs the question. Would foreign investors see "good investment opportunities" in the US if the dollar and stock prices were dropping, and interest rates were rising, as a result of escalating current account deficits?

The US trade deficit surpassed 4% of US GDP for the first time in August of 2000 (00P1), and 5% for the first time in September of 2002 (02P1). This prompted concern among economists that, unless the imbalance shrinks, the US could have serious problems attracting the foreign capital needed to finance such huge trade deficits (05P1). A 1/7/04 report (04B1) by the International Monetary Fund (IMF) was the most recent, lengthy and pointed, of a series of reports on the growing threats posed by the US trade deficit. When viewed in conjunction with the rapidly growing federal budget deficit ($374 billion in 2003), the IMF warned of "significant risks" not just for the US but for the rest of the world as well. It warned that the US' net indebtedness to the rest of the world could equal 40% of its total economy within a few years - an unprecedented level of external debt for a large industrial country, and one that could play havoc with the value of the dollar and international exchange rates, push up global interest rates and slow global investment and economic growth. (The US dollar has been declining since February 2002. In December of 2004 it was down by 55% against the euro and 22% against the yen. But even then, US imports continue to rise faster than US exports.) Under-funding for social security and Medicare at the same time as the exploding external debt makes the long-term fiscal outlook far grimmer. The Institute for International Economics supports the IMF outlook, as does Robert E. Rubin, former secretary of the Treasury, who warned that the federal budget was "on an unsustainable path." Warren Buffet, the legendary investor, said that the US is destined to become, not an "ownership society" but a "sharecropper society" (05G2).

Princeton economist Alan Blinder contends that, of about 140 million jobs that presently exist in the US, between 42 million and 56 million could be moved offshore during the next decade or two. This estimate includes all 14 million current US jobs in manufacturing and between 28 and 42 million jobs in the services sector (07M1).

The influence of foreign investors on the US economy is in no way minor. The US is now more dependent on foreign capital than it has been at any point in the past five decades (04M1). During the 12-month period 7/1/02 to 6/30/03 foreigners bought $231.5 billion in US Treasury Debt - more than during any 12-month period in the previous six years (04M1). This was nearly two thirds of all borrowing the Treasury did in that period. Foreigners (including foreign central banks) now hold more than $1.3 trillion of U.S. Treasury debt - about 36% of all Treasury paper outstanding (04M1). During 2002-2005, foreign investors (by buying US Treasuries) put up more than 80% of the $1.3 trillion the federal government borrowed during this period to help pay for tax breaks, Medicare prescription drug benefits and its two current wars (06W3). During this same period, foreigners put more than $700 billion into mortgage-backed securities, providing the money for millions of Americans to buy new homes or extract cash from existing homes to spend on consumables (06W3).

The US trade gap (a record $726 billion in 2005) and the federal budget deficit ($319 billion in 2005) are financed by foreign lenders, manly central banks in Asia and offshore hedge funds (06U2). Congress helped to prop up the US dollar in 2005 by offering a one-time tax break that induced many American companies to convert their foreign earnings into hundreds of billions of US dollars. That tax break has now expired for most companies. For the past few years the US economy has overcome the drag of big trade gaps and budget deficits, mainly because the housing boom let Americans borrow and spend, despite stagnant wages (06U2). But that boom has ended, a slowdown that will only worsen if American foreign indebtedness leads to sustained downward pressure on the dollar and upward pressure on interest rates. China recently stated its intentions to invest more of the dollars it earns via its trade surplus with the U.S. in other currencies (06U2).

All this is in sharp contrast to the performance of other developed nations. Western Europe, whatever its problems, manages economic policy to maintain modest trade surpluses (05G2). Germany and Japan both manage to keep advanced manufacturing sectors anchored at home, and to defend domestic wage levels and social guarantees. When they do disperse production and jobs overseas, as they must, they do so strategically. By contrast, Washington defines "national interest" primarily in terms of advancing the global reach of our multinational enterprises (05G2).

Ignoring huge US trade deficits as they continue to double every few years in an environment of exploding budget deficits and under-funded social security and Medicare subjects the US economy to increasing risks. It is not just US trade deficits and budget deficits that put downward pressure on the US dollar. Capital outflows from the US (US residents' acquisition of assets abroad) since 1983 have always been less than capital inflows into the US, indicating a consistent annual net indebtedness of the US to the rest of the world. In terms of the stock of assets, the US shifted from being a net creditor since the late 1920s to a net debtor by the end of the 1980s (04K3). There is a self-correction feature in this. A falling dollar effectively lowers US wages in the global marketplace, and this tends to reduce trade deficits. But so much of the developing world's population is outside the global economy, with subsistence-level wages of less than $2/ day (currently the global median wage) (00S1). (The World Bank estimates that 1.3 billion people subsist on $1/ day or less (96W2) (06W2).) Until these four billion people are integrated into the global economy (producing huge and non-sustainable increases in developed world trade deficits, and being impossible in other ways (Chapters 6 and 7)), developing world wages within the global economy are not likely to increase much above subsistence-levels. So US wages would need to fall extremely far to significantly reduce US current-account deficits. Also note that a falling dollar promotes inflation, hence rising interest rates, rising natural resource prices, and trouble in US stock markets.

The massive deficits virtually everywhere one turns in the US economy is having dangerous effects on the basic infrastructure of the US - trends that cannot possibly continue indefinitely. A report "Infrastructure 2007: A Global Perspective," released on 5/9/07 by the Urban Land Institute and Ernst & Young LLP concluded that US airports, roads, rail lines, bridges and other transit infrastructure are deteriorating across the US because of insufficient investment. The report says that the failure to address this "emerging crisis in mobility" will undermine the ability of the US to compete internationally. In 2005 the American Society of Civil Engineers graded as "poor" the condition on the US transit infrastructure as well as US power grids, dams and systems for drinking water and waste water. The US faces a $1.6 trillion deficit in needed infrastructure spending though 2010 for repairs and maintenance according to the ULI/ Ernst & Young report. China spends 9% of its GDP on infrastructure; India spends 3.5%. The US spends 0.93% of its GDP ($112.9 billion/ year) on infrastructure according to the ULI/ Ernst&Young study (Thaddeus Herrick, "U.S. Infrastructure Found to Be in Disrepair," Wall Street Journal (05/09/07) p. B4.).

Stephen Roach, chairman of Morgan Stanley Asia, said, "The very low US savings rate and related huge balance of payments deficit to attract funds from overseas are not sustainable things." The adjustment is likely to be long and painful. Roach estimates US net national savings at 1.4% of national income, and household debt at 133% of (one year's worth of) personal disposable income (08C1).

In the latest study by the World Economic Forum (Geneva), four Nordic nations ranked among the six most competitive economies, despite having some of the world's highest tax rates (04W3). (The US was #2.) Scores are based on criteria critical to sustained economic growth, e.g. the quality of economic policies, the fairness and transparency of public institutions such as courts, and technological prowess. Business people in these high-tax-rate Nordic countries benefit from huge state investments in education, training and infrastructure that these taxes fund. These investments make the Nordic countries competitiveness more sustainable than countries with lower taxes and higher debt (04W3).

None of the three basic trends - high stock market yields, falling interest rates, and increasing numbers of paychecks per household are sustainable (00M1). Nor are decaying infrastructure, ever-increasing credit-card debts, or selling the equity in one's home to finance current consumption. One might point out that US fertility rates have dropped significantly since around 1970, reducing living expenses for wage earners. However this trend, also, is non-sustainable, and net immigration is producing one of the highest population growth rates in the developed world, raising costs to the average American.

SECTION (3-C) ~ POLICIES FOR DEALING WITH GLOBALIZATION ~ [3C1]~Protectionism, [3C2]~Semi-Protectionism, [3C3]~Labor/ Environmental Standards, [3C4]~Convergence, [3C5]~Hindsight

All the grief listed in Section (3-A) has accomplished virtually nothing in terms of making US labor competitive in the global marketplace, and in reducing the dangerous economic risks noted in Section (3-B). US trade data (Table (1C-7)) show trade deficits increasing by a factor of 10 during 1992-2000. Some conclusions from all this are:

The situation, if anything, is likely to get worse because: (1) mobilities are increasing and (2) Multi-national companies are increasingly seeing greater returns on investment by locating new, state-of-the-art facilities offshore. Multinational corporations must ultimately find it impossible to ignore the financial drain resulting from developed-world labor working in obsolete facilities while drawing wages a factor of ten higher than those in the developing world.

Over the past few decades, US wages have fallen from first place among developed nations to the middle of the pack (Appendix B). So becoming more competitive within the developed world does not seem to fix much of anything. And even if that was the answer in the past, it is not likely to be the answer in the future. A breakdown of data on real growth of exports during 1985-96 gives the following: Developing economies: up 217%; World as a whole: up 94.2%; Industrialized economies: up 69.6% (DRI/ McGraw Hill data, Wall Street Journal (2/24/97)). With developing nations increasing their exports three times faster than developed nations, it is clear that the focus must be on US wage competitiveness with the developing world. Unfortunately this is where even export-industry jobs often pay subsistence-level wages (Appendix B). Might developing-world wages rise over the next few decades to match those in the developed world? For starters, this would require that about four billion additional people enter the global economy - people who are largely in subsistence-level conditions now. Problems related to this are examined in Chapters 5, 6 and 7. There, a case is developed for the global convergence point of labor prices being around those of today's developing world.

Clearly the pace of convergence of labor prices is too slow to reduce the risks noted in Section (3-B). Pains accumulated since around 1980 (Section (3-A)), are mere nibbling at the margins. Far faster nibbling rates, or alternative responses to the problem, are needed. Below are some alternatives.

Part [3C1]~ Protectionism ~
A return to protectionism has been the most common response to globalization-related problems in the past (Section (1-B)). Prior experience does not bode well for this response. Restoration of protectionism following periods of "free trade" has done little to slow import/ export rates (93M1). Import/ export rates are now far larger than in the historical past. So prospects for dealing permanently with globalization through protectionism would seem slight in this day of extremely high (and rapidly growing) mobilities of all components of economic activity - and high driving forces (labor price gradients) for Type B globalization (defined in Section (1-D).) Thus, even if the historical past did find protectionism to be workable, future workability seems improbable. One advocate of protectionism, Patrick Buchanan, has argued that, historically, protectionism has benefited the US (Section (1-B)), but the historical past was a time of far smaller mobilities than the present is confronting.

Japan is doing well, economically, with a policy of covert protectionism (See the end of Chapter 4). It seems to be able to protect its high labor prices with a combination of covert restrictions on imports, strict limitations on immigration, and an intense focus on quality of exports and efficiency of production. For example, by using such procedures as critique to debug its electronics manufacturing processes, Japan has been able to reduce rejection rates to about one in 10,000, as compared to one in 3 in some American electronics manufacturers (that have now largely gone out of business). Germany, too, protects its high labor prices with a focus on quality of exports and efficiency of production. It is also tightening up on immigration. Joblessness and economic stratification are increasing in both nations however. (See Section (G-1) of Ref. (08S1).)

There are examples of "protectionism" that are undeniably beneficial, if not essential, for mankind's survival. For example, the EU, Japan, Switzerland and Norway subsidize their farm sectors (03M3). This practice is quite defensible up to some ill-defined limit. Farms in the EU, Japan, Switzerland and Norway operate with an eye toward sustainability of their outputs. Most of their agricultural competitors do not. Agricultural sustainability costs money (For details, see this author's analysis of the sustainability of the global outputs of food, wood and freshwater found on this website.) So forcing these farmers to compete directly with farms in North America, Australia, and the developing world where sustainability considerations are largely, if not totally, ignored would have serious repercussions, suggestive of a "race to the bottom" in terms of global agricultural sustainability.

In the US, "mixed agriculture" (a mix of livestock and crops) is far more sustainable than a more profitable mix of large corporate farms (with their vast monocultures) and feedlots and "Concentrated Animal Feeding Operations" (CAFOs). In the latter case, it is usually not economical to transport livestock manure to croplands. This seriously limits the rates of chemical fertilizer application if serious damage to cropland soils is to be avoided - limits often ignored. It also results in breaching of manure-holding ponds, resulting in major damage to downstream water supplies. Acknowledging the sustainability benefits and other societal benefits of "mixed agriculture" with greater subsidies would have clear societal benefits. Modern-day globalization rules would forbid such practices however. This sort of thing tends to result in the often-heard characterization of globalization as a "race to the bottom."

Part [3C2]~ Semi-Protectionism ~

Another alternative response to Type B globalization is trade agreements fashioned to maintain trade deficits of every nation at zero, or at some other upper limit - "semi-protectionism" for want of a better name. It offers the following advantages:

"Semi-protectionism" (or a crude form of it) is effectively under way already. Without it, US trade deficits would be significantly larger and pose greater risks. Many WTO rules have had the effect of prying open emerging markets in the developing world to exports from the developed world, while leaving intact large barriers to the entry of developing world products into developed world markets (02F2). Eliminating these remaining trade barriers could lead to income gains for the developing world of about $130 billion/ year (02F2).

"Semi-protectionism" would reduce imports into the US by about 27% as a first-order estimate. Semi-protectionism would probably not work over the long term. World trade would continue to grow almost as rapidly as today, based on developed-world export rates. So the proportion of imports in the US consumer's market basket would continually increase after the adjustment. The basic high driving forces for Type B globalization (defined in Section (1-D)) remain largely unchanged. Semi-protectionism represents a fairly small decrement to the overall mobility of components of economic activity in an environment of growing mobilities of virtually every component of economic activity. Thus convergence of labor prices, worldwide, could be slowed but not halted. If the time "purchased" through the slowing of the global convergence of labor prices were to be put to good use in addressing some key underlying problem (e.g. population growth in developing nations; a major cause of their low wages and related problems), then semi-protectionism might offer some benefit. This and other potential "damage-control" measures are outlined in Chapter 8.

Part [3C3]~ Labor/ Environmental Standards ~
In political battles over trade agreements of the past decade, US labor and environmental interests indicated that they would approve of the various trade agreements if these agreements contained provisions that required imports into the US to have been produced under labor health/ safety standards and environmental standards typical of the corresponding standards on goods produced within the US. Such constraints would reduce mobilities and driving forces somewhat, but probably far less than the mobility reductions envisioned in the "semi-protectionism" alternative alluded to above. As such, they would have even less chance of stemming the global convergence of labor prices. They would eliminate some of the de facto subsidies that goods imported into the US enjoy, and thereby "level the playing field" a bit, reduce driving forces and make markets more efficient in the Adam Smith sense. But wage differentials between developed-world and developing world labor would still provide huge net driving forces for globalization.

Part [3C4]~ Convergence ~
Convergence of developed- and developing-world labor prices seems to be the only remaining alternative. The laws of physics, applied to the present global situation and to the basic concept of a free market, require it. This is not to say that it will work out for the best in the end, or that it is the fairest, or that a cost/ benefit analysis finds it to be the optimal alternative. The only point to be made is that the problems associated with it are problems inherent in the present global situation, not problems with the concept of a free market or with the way driving forces and mobilities are determined or applied. Any problems with this alternative are probably best dealt with by addressing the problems with the present global situation (Chapter 8). Other approaches are likely to fail in the end.

Chapter 7 estimates the convergence point for labor prices, and finds it to be in the vicinity of developing-world conditions. Major developed-world labor price cuts would have to occur by deliberate action (politically difficult), continuations of present-day trends (too slow to avoid the risks outlined in Section (3-B)), or as a result of a meltdown scenario such as the one outlined in Section (3-B) (the likely route, by default). Also note that it is impossible to merge just economies. Any "merger" would, of necessity, include the social, political, environmental and instability characteristics of the developing world as well. Some of these are listed in Table (1A-2). If one considers the huge racial, ethnic, religious and cultural diversity in the US, and the fact that an economic meltdown of smaller magnitude precipitated WWII, one can easily envision the nightmare that could engulf the more diversity-rich regions of the developed world such as the US.

Much of what stability exists in the developing world is derived from aid, loans, technology, food, customers and peacekeepers provided by developed nations. These stabilizers probably would not survive labor-price-convergence. Past experiments in free trade have reverted to protectionism when the going got rough. So convergence would probably be a meandering, nasty process rather than a straight-line approach upon a steady state.

Part [3C5]~ Hindsight ~
One obvious question is, "what did the developed world do wrong that got it into this growing nightmare?" The answer: "plenty." The growing mobilities of all key elements of economic activity have been increasingly evident for decades. The huge differences, including wage differentials, between the developed and developing worlds have been increasingly evident for an even longer time frame. The causes of these differences between the developing world and the developed world were too often seen simply as bad leadership in developing nations (08S5) -problems that could, in theory, be fixed quickly whenever the need arose. Current problems in Afghanistan and Iraq and past problems in Lebanon have shown the folly of the "bad leadership" theory. Also, misguided impressions exist in developed nations that benefits could be derived from using low developing world wages to serve as

These misperceptions and ill-conceived benefits prevented many in the developed world from seeing the Faustian bargain inherent in Type B globalization of an extremely bipolar world.

The "bad leadership" theory of developing world ills (that developed during the Reagan administration during the early 1980s (08S5)) prevented many from realizing that developing world ills stem from far deeper causes - causes not amenable to quick fixes. They produce consequences that are growing increasingly costly to both developing and developed worlds (08S5). The key problems that serve to largely define the differences between developed and developing worlds have been analyzed and identified in some detail by this author (08S5). Analyses by such organizations as the CIA (00C1), the World Bank (02M3), the RAND Corporation (98B3) (00N1), the Worldwatch Institute (numerous documents) and others have produced similar conclusions. The key causes of developing world problems are seen by these publications as being related to:

Some religious fundamentalists see population-related concerns as indirectly detrimental to their advocacy against artificial contraception, abortion, economic opportunities for women etc. (08S5). Since around 1980 these fundamentalists have been able to block any substantive US efforts to provide family-planning-related services to those who want, but cannot obtain, such services. If any one mistake lies at the heart of the world's difficulties in dealing with Type B globalization, it is the developed world's inability to seriously support international family planning.

Go to the Table of Contents of this entire document (Top of Chapter 1)
Go to top of Chapter 2 ~ Does Globalization Produce Convergence? ~
Go to top of Chapter 3 in this file ~ The Convergence Process ~ (the top of this second file)
Go to top of Chapter 4 in this file ~ Effects of, and Responses to, Convergence ~
Go to top of Chapter 5 ~ Financial Capital Constraints on Convergence ~ (top of the third file of this document)
Go to top of Chapter 6 ~ Natural Capital Constraints on Convergence ~
Go to top of Chapter 7 ~ The Convergence Point ~
Go to top of Chapter 8 ~ Strategies for Living with Convergence ~
Go to top of Chapter 9 ~ Politics of Globalization - déjà vu ~
Go to Chapter 10 ~ References ~
Go to Appendix B ~ Driving Forces for Globalization ~
Go to the Home Page of this website ~

CHAPTER 4 ~ EFFECTS OF, AND RESPONSES TO, CONVERGENCE ~

(4-A)~The Subsistence-Level Labor Pool Constraint on Real Wages ~
(4-B)~
Some Optimistic Studies ~ [4B1]~A World Bank Study, [4B2]~A Harvard University Study, [4B3]~Intrinsic Biases in Studies of Globalization Economics, [4B4]~Escapes from Extreme Poverty, [4B5]~A Rand Study,
(4-C)~Some Case Histories of the Links between Globalization and Economic Growth ~ [4C1]~The Arab World, [4C2]~Viet Nam, [4C3]~China, [4C4]~Chile, [4C5]~Ethiopia, [4C6]~India, [4C7]~Russia, [4C8]~Southeast and Eastern Asia, [4C9]~Latin America, [4C10]~Japan's Experience in Resisting Globalization, [4C11]~The EU Experience with Globalization, [4C12]~ The Developing World's Experience with Globalization, [4C13]~The 50 Least Developed Countries, [4C14]~Cambodia, [4C15]~Conclusions,
(4-D)~Some non-Optimistic Studies ~ [4D1]~The Clark-Mander Study, [4D2]~The Weisbrot et al Study, [4D3]~A Recent IMF Study, [4D4]~The Milanovic Study, [4D5]~An Emerging Picture
(4-E)~The Out-Sourcing-In-Sourcing Debate ~
(4-F)~
Blaming Globalization or Blaming its Context - And Does it Matter?
~

A common argument, whether expressed or implied, is that the end-state of the globalization/ convergence process will be worldwide steady-state conditions much like those in the developed world of today. Such arguments ignore numerous formidable constraints. Table (4-1) (below) lists a few.

Table (4-1)~ Some Constraints Hindering Convergence at Developed-world Standards of Living ~

Other developing-world problems are pointed out in Chapters 5, 6 and 7 and Ref. (08S5).

SECTION (4-A) ~ THE SUBSISTENCE-LEVEL LABOR POOL CONSTRAINT ON REAL WAGES ~
Huge and growing pools of unemployed, subsistence-level labor exist throughout the developing world. The global economy could not possibly absorb this pool without the developed world hitting trade deficit constraints (Section (3-B)) and/or without the world as a whole hitting natural capital constraints (Chapter 6). So the overwhelming bulk of labor earnings in export-oriented businesses in the developing world must remain largely at subsistence levels (except for a small minority of plant managers, etc.).

A major source of people for these huge and growing pools of unemployed, subsistence-level labor is developing world population growth - about 1.3% per year (08S5). Another major source comes from the fact that the bulk (typically 70%) of employment in subsistence-level economies is in agriculture, forestry and fisheries. These activities are undergoing a transformation from a labor-intensive- to a capital-intensive mode of operation, meaning that employment per acre is reduced by on the order of 90-97%. Since the only undeveloped agricultural lands are on steep, rocky hillsides where agriculture is non-sustainable (08S2), this conversion process also adds greatly to the wretched slums ringing the cities of the developing world (08S5). To add to the problem, the US is dumping huge amounts of surplus agricultural produces in the developing world at heavily subsidized prices -in violation of the spirit and intent of free enterprise and globalization. For example, NAFTA has displaced 1.75 million Mexican farmers from their land (during NAFTA's 10-year lifetime), forcing them to migrate to Mexico's cities or to the US (04M2).

An example from Indonesia is illuminating (02D1). A supervisor in a plant making shoes for Nike earns $90/ month, so the average worker must make a good bit less. Median earnings in Indonesia are under $60/ month. This is subsistence level in a largely agricultural country where incomes are augmented by homegrown food. Those who migrate to urban areas to work in shoe factories find much higher rents, and food priced at global marketplace levels - not homegrown levels. So subsistence-level living costs for shoe manufacturer labor are bound to be well above $60/ month. The price of subsistence for the average worker in Nike plants thus probably remains close to what they are being paid. Indonesians went on strike in May 1997 for an extra 20 cents/ day that would have given them $2.46/ day as mandated by a new minimum-wage law. Nike suggested that Indonesians were pricing themselves out of the labor market (In 1997 $2.46/ day covered 90% of the basic subsistence needs for one person (97B1)). Shoe manufacturers are now leaving Indonesia in droves for countries like Vietnam and China where wages are even lower, possibly because workers there are not allowed to organize, as they are in Indonesia (02D1). (Vietnamese Nike workers earn $1.60/ day, while three simple meals cost $2.00 (97B1)). Wages in developing nations may very well be rising due to globalization in terms of dollars. But if wages are expressed as a fraction of the cost of subsistence, they are probably hardly growing at all - or they are growing much slower than in pre-globalization days. This can be demonstrated by examining consumption growth instead of GDP growth (See a table later in this chapter.). There is no clear reason why consumption growth should increase as a result of globalization. Economists add up returns to capital (even though these go largely to off-shore multi-national corporations) and add wage increases (in dollars, not in subsistence units) and point out the "economic (GDP) growth" that globalizing countries are experiencing. Consumption growth tells a far different story. (See a table later in this Chapter.)

SECTION (4-B)~ SOME OPTIMISTIC STUDIES ~ [4B1]~A World Bank Study, [4B2]~A Harvard University Study, [4B3]~Intrinsic Biases in Studies of Globalization Economics, [4B4]~Escapes from Extreme Poverty, [4B5]~A Rand Study,

Part [4B1]~ A World Bank Study ~

A World Bank study "showed" that poverty in developing nations steadily rose until the 1980s, when it began to recede as globalization increased. (Data on consumption growth later in this document show this statement to be false. See Table (4D-1)) The 24 countries that welcomed greater integration into the global economy in the past 20 years, including China, India and Mexico, achieved annual (GDP) growth rates of about 5% in the 1990s. But countries such as Egypt, Algeria, Iran and Pakistan, described as "less globalized" economies saw their economies stagnate or decline (Wall Street Journal (12/6/01)). All this may sound like a compelling endorsement of globalization, but note that China, India, Mexico and all other globalizing nations have huge pools of subsistence-level labor, so there is no reason why wages, even in businesses producing for export, should rise above subsistence level. (See Section (4-A) above.) For the 5%/ year GDP "growth" figure to be meaningful, the increased costs of subsistence must be deducted, as must be the earnings on the capital belonging to multi-national corporations. Also, for the World Bank study to be meaningful, the only major difference between economies of the globalized group and those of the non-globalized group would have to be the degree of globalization. The examples listed suggest that this precaution was not taken (see below). It also appears that those who allude to the World Bank study are engaging in data-selectivity. An IMF review (03P1) of 14 major studies of the effects of financial integration on economic growth concluded "There is no positive and robust association across developing countries between faster increase in financial integration and faster improvement in a society's health." The most thorough and statistically advanced study (02E1) of those 14 studies concluded that, overall, there is no robustly significant effect of financial integration on economic growth (03P1).

Africa provides an interesting example of the absence of a link between GDP growth and improvements in standards of living. On the basis of foreign trade as a share of GDP, Africa's economy is one of the most open regions in the world, behind only East Asia (05A5). One might expect that fact also to show up in terms of improving standards of living. But that, too, is not the case. Africa's average GDP growth has been nearly 4%/ year (1.5%/ year/ capita) during the last decade (05A5). About 25% of Africa's countries show growth rates of at least 5%/ year over the last decade. Average annual GDP growth increased steadily from less than 3% in 1998 to 4.6% in 2004. Yet, at least 61 million more Africans go hungry today than in 1990. Africa has the world's highest incidence of poverty, and poverty in Africa is chronic and rising. The share of the total African population earning less than $1 a day (46%) was higher in 2005 than in the 1980s and 1990s (05A5). Markedly improved macroeconomic performance (GDP) in Africa since the mid-1990s, seems also to have had little impact on unemployment. Africa's unemployment has hovered around 10% since 1995 (05A5). Apparently economic growth as measured by the GDP has little clear effect on poverty or unemployment. It is even worse than the above figures indicate. The past few decades have seen large-scale transfers of African workers out of the "formal" economy (where they make perhaps $2/ day) into the "informal" economy (where their earnings are more likely to be $1/ day). Workers in the "informal" economy also face a high exposure to risk, given the conditions they live and work in (00C2) (08S1). "Informal" workers also tend to have little or no access to formal risk-coping mechanisms, such as insurance and pensions. They typically lack the resources to pay for housing, healthcare, education and training (05A5). Economists have a hard time figuring out how "informal" workers even survive. Yet advocates of globalization see the developing world's rapidly expanding hordes of "informal" workers as growing throngs of entrepreneurs, despite their total inability to accumulate financial capital beyond that needed for the barest of necessities. More information on the origins and growth of the "informal" economy in the developing world is found in Section (4-C) [C12] and in Ref. (08S1).

Part [4B2]~ A Harvard University Study (97R1) ~

A study at Harvard University showed that, of a sample of 117 countries, those with more open economies grew 4.5%/ year (presumably in GDP) between 1970-89, while those with relatively closed economies grew at only 0.7%/ year (97R1). To be meaningful, the two corrections pointed out above for the World Bank study would need to be applied. The above comments on "data selectivity" also apply. Also, to be meaningful, the only major difference between economies of the "open" group and those of the "closed" group would have to be the degree of globalization. This was probably not the case. For example, South Korea, Taiwan, Singapore, Japan and Hong Kong (all "open" economies) undertook major family planning programs during 1960-90, reducing fertilities from six to two (1.8 in east Asia). This produced a huge "demographic bonus" that was partly responsible for the impressive rise in East Asian savings and investment rates since the late 1960s. This is believed to have been a significant factor in these nations becoming the world's five fastest growing economies in the world during 1960-1990 (98B3). The net effect of the reduction in "dependency ratio" (dependents per worker) in northeast and southeast Asia was large enough to produce the entire decline in foreign capital dependence after 1970, by itself turning these regions from net debtors to net creditors on world capital markets (98B3). Between 1965-90, the slowing of population growth accounted for as much as one third of the rapid growth in per-capita income in East Asian countries like South Korea and Taiwan (98B4). All of these nations have moved to, or close to, developed-nation status. There is probably not a single "closed" economy that undertook a capital-formation program even remotely comparable to the five examples listed here. Also, Vietnam and China undertook numerous major economic policy initiatives that were either unrelated to, or in direct opposition to, globalization. (See Section (4-C) below.) Therefore these six nations ought to have been excluded from the studies alluded to in this section. It is doubtful that this precaution was taken.

The bulk of the countries that have not "embraced" globalization are mainly those of the Arab (Muslim) world and African nations. They are all plagued by high population growth rates. (The Muslim world has the world's highest population growth rate, and Africa has the world's second-highest population growth rate.) High population growth rates create dire shortages of financial capital (and hence human capital) due to the financial capital drain of infrastructure growth required by population growth (08S5). As a result of the wretchedness created by the lack of financial capital, these two regions are also the locations for the bulk of the world's civil and international conflicts, warlordism, terrorism, and social, political, economic and military instability. It would be far more truthful to say that globalization did not embrace these regions than to say that these regions did not "embrace" globalization. They have nothing to offer the global economy but a limitless supply of unskilled labor - labor that typically earns subsistence-level wages, regardless of the level of globalization. (See Section (4-A).) Africa captures less than 3% of global foreign direct investment, and most of that is from mining and oil companies, which have little choice but to go where the minerals are (06R2). The picture in the Arab (Muslim) world is virtually the same. Various studies have found that countries with significant amounts of human capital benefit more from globalization than countries with little more than unskilled labor. (See elsewhere in this document.) Thus countries with significant amounts of human capital are more likely to embrace globalization, while countries that offer little more than unskilled labor (e.g. the Arab world and Africa) are less likely to embrace globalization. So the only honest way to judge the effects of globalization is to compare countries with the same average skill level of the work force but that "embrace" globalization to different degrees. It seems doubtful that the Harvard University study bothered to take this precaution.

Over the decade from around 1985-1995, per-capita GDPs in China, Chile and Indonesia nearly doubled. In Thailand, per-capita GDP more than doubled (97R1). The Indonesian case study described in Section (4-A) above suggests that any positive interpretation one might place on these statistics is probably misleading. There are major pools of subsistence labor in all of these countries, so there is no reason why wages above subsistence level should be paid to the overwhelming bulk of the labor force. The Chinese government has limited access to the squalid agricultural interior of China, so it is quite likely that interior agricultural incomes are not part of the overall statistics. Also, China limits the mobility of farmers in China's interior (80% of China's population) and prevents them from migrating to export-oriented manufacturing jobs on China's coast (08B1) (08B2). All of this suggests that there is something grossly in error or misleading about the per-capita income data. (Average factory wages in China are about $0.40/ hour (02I2).) China is discussed in more detail in Section (4-C) below. Studies alluded to above (03P1) (02E1) and described in more detail below show that any inferences drawn from the first sentence of this paragraph are engaging in data-selectivity.

Part [4B3]~ Intrinsic Biases in Studies of Globalization Economics ~

In considering the three studies alluded to above that purport to show economic benefits to globalization, it is important to consider whether there are significant intrinsic biases that could have produced the observed variation of economic benefits irrespective of the degree globalization. It turns out that there are numerous significant intrinsic biases. One develops a strong suspicion of this just from looking at the geographical variation of the nations that embrace or reject globalization. The Arab (Muslim) world has overwhelmingly rejected globalization (02E2) or, more accurately, has been rejected by foreign capital, while nations of the Far East and Southeast Asia have embraced it. If rejecting or embracing globalization were a matter of choices and biases of individual governments and individual leaders, there should be no such large-scale regional variations of attitudes toward globalization - the pattern should be far more random. There are sound reasons why the Arab/ Muslim world should see far fewer benefits and far greater costs inherent in globalization that should the Far East and Southeast Asia (see below). These same basic factors are also the causes of far less economic growth in the Arab world than in the Far East and Southeast Asia. Thus interpreting differences in economic growth rates of the two regions in terms of globalization is simply an error in linking cause and effect. There are numerous other instances in which the linkage between economic growth and globalization has been grossly misinterpreted. Below are some pertinent case histories.

Part [4B4]~ Escapes from Extreme Poverty ~

Paul Wolfowitz (President of the World Bank Group) noted (06W2) that, in the past 25 years (the latest period of globalization), 400 million people worldwide have escaped extreme poverty, making this the most successful quarter-century in the history of the fight against poverty. This seems to conflict with the data of Table (4D-1). To resolve this apparent inconsistency, note that "extreme poverty" refers to bare subsistence - barely enough income to buy food. Over the past 45 years, prices of food have fallen significantly, reflecting three major processes: (1) a major expansion in the production and use of chemical fertilizers; (2) major developments in plant genetics (the "Green Revolution") that enabled plants to make better use of chemical fertilizers; (3) major expansion in large-scale irrigation, driven primarily by the development of new technologies such as pumps for extracting groundwater from deep underground, and by the improved economics of irrigation resulting from the "Green Revolution" and chemical fertilizers. All of these events had their beginnings some decades before globalization became an important issue. None of these events were made possible by the various trade agreements that comprise a significant part of what is referred to as "globalization." In fact, the "Green Revolution" evolved from government- and non-governmental-organization funding (subsidization) of scientific research - something contrary to a goal of globalization (elimination of subsidies). Also the development of chemical fertilizers was a result of (German) government-funded research - another subsidy.

Huge IMF- and World Bank loans for developing-world irrigation systems were fatally flawed from the outset, since they entailed heavily subsidized water consumption. This caused developing world governments to incur staggering loan repayment expenses that resulted in "Structural Adjustment Programs" that dealt staggering economic blows to developing world people (08S1) (See Section (4-C) [C12]). These blows probably explain a good part of Table (4D-1).

A large fraction of the 400 million people who escaped "extreme poverty" in the past quarter-century were in the Far East (mainly China) where active family planning programs enabled citizens to fund the human capital creation needed to evolve toward developed-nation status. Globalization played little, if any, role in these family-planning programs. These programs were heavily government subsidized, and began about two decades before the onset of globalization. A large share of the remaining escapees from extreme poverty were in India where the government has long been heavily involved in increasing chemical fertilizer use, promoting the Green Revolution, and encouraging large-scale irrigation. It is important to note that chemical fertilizer, the Green Revolution, and large-scale irrigation all have severe limitations that make it unlikely that they will be able to support the 50% increase in developing world population expected by 2050 (08S2).

Part [4B5]~ A RAND Study (04K3) ~

The RAND study of "Forces Shaping the Future Workforce and Workplace in the US" provides a different characterization of globalization than that offered here. One should note that the Study was done for the US Department of Labor that would probably not take kindly to any analysis suggesting that US labor is a significant net loser in the globalization process, or that it might become a loser when the US is forced to address its staggering trade deficit. The RAND study suggests, for example, that the growing polarization of the earnings of labor in the US is largely a consequence of growing demands for high-skilled labor bought about by the growth in use of computers in the US economy. The rebuttal of this position is found in Section (3-A) [A13] so it is not repeated here.

The RAND study also characterizes the effects of globalization on the US economy as a situation in which some sectors of the economy gain and some sectors lose, with the net difference being positive. Lists of winners and losers are not provided, so they must be inferred, and this is done below. Never once does the Study refer to the massive trade deficit that the US is amassing, nor does it speculate on what the effect on US labor might be when the US is forced to take actions that address its deficits in trade, current accounts, and the federal budget.

Exportable Services: The growth of US trade in services (e.g., travel/ transportation services, telecommunications services, education, financial services, business services, technical services, royalties and license fees) and the positive trade balances of the exportable portions of the US services sector would probably cause that sector to be on the list of winners. But this would seem to reflect merely a large head start in the various technologies, patents, royalties, investments in research, business software and procedures that the US currently enjoys. There appear to be no exportable services that the developing world is not capable, over time, of developing to the same levels of sophistication as that found currently in the US. Multinational corporations can transfer the necessary capital and technology needed to catch up to the US in this sector to the developing world quickly and easily. The supply of labor that is educated, or in the process of being educated, in the developing world is sufficient to displace every US worker in the exportable services sector many times over. Ultimately the exportable services sector of the US economy must wind up on the "Loser" list. The only remaining question is whether this sector will wind up there before or after the US addresses its huge external indebtedness.

Exportable Manufacturing: The effects of globalization on the exportable manufacturing sector of the US economy clearly put exportable manufacturing on the loser list. The RAND study even lists a lot of the data that show the effects of globalization on US manufacturing labor. When the US addresses its trade deficit, the effects on this sector of the economy can be expected to become a lot worse.

Non-Exportable Services, Construction and Manufacturing: These sectors are less affected by globalization, but their incomes are significantly derived from sectors of the economy that are directly affected by globalization. One can hardly expect the earnings of educators, health-care people, retail clerks, homebuilders, employees of state and local governments and postal workers to not track the earnings of those involved in exportable services and exportable manufacturing over the long run.

The above suggests that the sectors of the US economy on the RAND list of winners are far from apparent. It is even more difficult to imagine a list of yet-to-be-identified winners big enough to cause the net effects of globalization on US labor to be positive. The fact that the RAND study did not produce such lists would suggest that the RAND surmise that winnings outweigh losses (either before or after the US addresses its many-headed external-deficit monster) is suspect at the very least.

SECTION (4-C) ~ SOME CASE-HISTORIES OF THE LINKS BETWEEN GLOBALIZATION AND ECONOMIC WELL-BEING ~
[4C1]~The Arab World, [4C2]~Viet Nam, [4C3]~China, [4C4]~Chile, [4C5]~Ethiopia, [4C6]~India, [4C7]~Russia, [4C8]~Southeast and Eastern Asia, [4C9]~Latin America,
[4C10]~Japan's Experience in Resisting Globalization,
[4C11]~The EU Experience with Globalization,
[4C12]~The Developing World's Experience with Globalization,
[4C13]~The 50 Least Developed Countries, [4C14]~Cambodia, [4C15]~Conclusions,

One of the most compelling analyses of the link between globalization and economic well-being comes from a United Nations Development Program (UNDP) study. In a 152-page report released in late June of 2006, the UNDP disputes the US position that removing trade barriers is the surest way to reduce poverty. Instead the UN advises poor Asian countries to do what Japan and South Korea did successfully in the 1970s and 1980s: protect key industries temporarily with tariffs before exposing them to foreign competition (06W1).

The UNDP report says Asia's poorest countries have been left behind even as trade has exploded across the region. From 1980 to 2000, tariffs fell from an average 34% to 8% in East Asia and the Pacific, and from 60% to 18% in South Asia. As tariffs came down, trade boomed - rising from 45% of Asia-Pacific economic activity in 1990 to 81% by 2003. The region now accounts for about 30% of world exports, a figure the UNDP believes could hit 50% within a decade. But across Asia, job growth fell from 337 million in the 1980s to 176 million in the 1990s, not even enough to keep up with population growth. Increasingly, the UNDP says, expanding trade is creating jobs for skilled laborers, not for uneducated rural Asians who can no longer make a living on the farm. This is partly because these farms, in a globalized environment, must compete in a global marketplace with the heavily subsidized agricultural products of developed nations. The UNDP now urges poor Asian countries to impose tariffs on farm imports to protect their own farmers (often 70% or more of the economies of poor Asian countries) and food supplies (06W1). The case study of Cambodia (given below) illustrates what the UNDP is talking about.

Part [4C1]~ The Arab World ~

The Arab world has the highest population growth rate in the world and in probably the world's most degraded environment. (Arid environments are inherently very fragile.) The Far East and Southeast Asia have far lower population growth rates in less degraded environments. As a result, financial capital is far scarcer in the Arab world since so much financial capital is consumed in expanding the infrastructure necessary to accommodate population growth. This means that human capital is also far scarcer, political-, social- and economic instabilities are far greater, education is of far lower quality, financial capital is far less safe, and capital-starved production facilities are far less competitive in world markets. The resulting wretchedness and hope deprivation are preyed upon by religious fundamentalists who promote terrorism as a proxy for religious warfare, sop up scarce financial capital for religious structures and personnel, focus education on memorization of religious documents, limit educational and economic opportunities for women and oppose family planning and abortion - all of which make financial capital even scarcer. The effects of all these factors on economic growth are obvious. But how do they affect attitudes toward globalization?

Because of the lack of human capital and low quality of education, technological spillovers arising from foreign direct investment are much harder for the Arab world to come by. These spillovers are not yet visible in the Arab world (02E2). The well-known lacks of public institutions, physical infrastructure and human resource development, high business costs of corruption and far less safety for financial capital in the Arab world makes it far less attractive to foreign investors. As a result, they demand far more in other terms (subsidies, returns on investment, freedom to repatriate investments, relaxed local content requirements etc.) Lowering the Arab world's high tariffs pose far greater threats to under-capitalized Arab world industries. Thus globalization poses greater threats in terms of bankrupting local industries and thereby eliminating the scarce financial capital these represent. Poverty and instability make privatization processes far less appealing to foreign investors. It has become clear to Arab leaders that all the Arab world offers to foreign investors is cheap, unskilled labor. This is easy to see from the fact that the bulk of what little foreign direct investment there is in the Arab world is directed predominantly to petroleum-related and other natural resource activities (02E2). This translates into subsistence wages, very limited opportunities for human capital formation, and little by way of technological spillover. This tells Arab leaders that globalization provided little in terms of prospects for eventually creating strong internal economies independent of export-related activities. Now it is easy to see why Arab world leaders see globalization from perspectives far different from those common in the Far East and Southeast Asia. It is also easy to see why interpreting the Arab world's economic ills in terms of its attitude toward globalization instead of in terms of the root causes of these attitudes is so misleading.

Part [4C2]~ Viet Nam (03S2) ~

Viet Nam's rapid economic and agricultural development over the 1990s is regarded as one of the most successful development stories of the 1990s. GDP growth in the 1990s averaged 7.6%/ year. In the 1990s, agricultural output grew almost 5%/ year (01G1). Poverty has declined; the number of under-nourished has dropped by 3 million people (01F1). Over the 1990s, the value of agricultural exports increased by a factor of 3.5.

Viet Nam's economic renovation program, Doi Moi, began in 1986. It involved "decollectivization" - giving farming families most of the land. Farmers were allowed to increase sales to the market. Agricultural taxes were reduced. A Treasury system was created. The banking system was reformed. This created a secure deposit base, and allowed fiscal operations far into Viet Nam's rural areas. These measures encouraged entrepreneurship and risk-taking. "Return" options were given to workers in new factories, thereby reducing risk for internal migrants and accelerating development in rural areas. Viet Nam raised its agricultural import tariffs often during the 1990s. Subsidies were created to subsidize agricultural production and exports. Viet Nam, starting in December 1999, converted many non-tariff barriers into tariffs, with rates of 30-100%. A support (subsidy) program helped Viet Nam's coffee growers regain international competitiveness. This involved subsidies to upgrade coffee quality, reduce production costs, create agricultural infrastructure, and shift towards improved coffee varieties. Note that none of this had anything to do with globalization. In fact, virtually all of it was in direct opposition to globalization's basic philosophy of reducing subsidies and tariffs, minimizing government's role in economic activity and promoting free markets.

Part [4C3]~ China (03S2) ~

A similar set of reforms occurred in China in the late 1970s. China's communal farming system was loosened. The so-called "household responsibility" system was introduced, allowing farmers to sell their crops on the free market once they had fulfilled their quota obligations to the state. Agricultural inputs (water, fertilizer, new technologies, genetic improvements to crops etc.) were subsidized. Domestic policies also encouraged the exit from agriculture of unproductive farmers by creating village enterprises to absorb excess rural labor. China also made massive investments in rural infrastructure. Again note that none of this had anything to do with globalization. In fact, virtually all of it was in direct opposition to the basic philosophy of globalization and its associated trade agreements calling for reducing subsidies, decreasing government involvement in economic activity and increasing influence of multinational corporations. China is now pulling foreign direct investments (FDI) away from virtually everywhere else in the developing world. It accounted for 91% of FDI to Asia in the first half of 2003 (79% in the first half of 2002) (03K2). It is also pulling jobs away from nations like Mexico, Indonesia and South Korea (03K2) sometimes to the point of causing economic hardship and social unrest.

Some also note that China's agricultural output tripled, as did agricultural exports, while the number of under-nourished declined by 76 million people (from 1990/92 to 1997/99). China was the largest contributor to the reduction of under-nourishment during the 1990s, accounting for two-thirds of the progress made in fighting hunger (01F1). To attribute this in any way to globalization, however, is far-fetched. This was a global phenomenon universally attributed to (1) huge increases in inorganic fertilizer consumption, (2) large-scale irrigation system development, and (3) genetic improvements to grains. All of these benefited significantly from subsidies that globalization-oriented trade agreements would have taken dim views of. The growth of Viet Nam's agricultural production and exports (noted above) is readily attributed to these same three factors.

Part [4C4]~ Chile ~

Chile's economic growth, like that of Viet Nam and China, is also seen as a globalization success story, but closer examination indicates that Chile's economic growth resulted more from ignoring the advice of globalization's advocates than from heeding it (04J1). A major factor in Chile's economic growth is its salmon aquaculture industry. But this industry is not a case study in free markets. It was a result of the government developing the technology for salmon cultivation for wide-scale commercial use and then selling the technology to private industry (04J1). The Chilean government also wielded its considerable influence in:

It is interesting to note that most of the rest of South America has been heading in the opposite direction from the policies noted above - in response to advice from advocates of globalization. These same countries are now facing economic hardship and social and political instability that tend to make financial capital less safe and thereby perpetuate economic decline. It is also interesting to note that, before engaging in the above, Chile conformed far more closely to the advice of globalization's advocates. The result was an economy close to economic collapse. This precipitated the above-mentioned anti-globalization policy changes and then the economic successes that globalization advocates are now so quick to attribute to globalization.

Part [4C5]~ Ethiopia (03T1) ~

Ethiopia offers an example of extreme economic hardship as a result of taking bad advice from international lenders and other advocates of globalization. These external influences encouraged huge increases in food production, while discouraging government activities (subsidies, tariffs, etc.) in all the other aspects of the overall agricultural system that countries like Viet Nam and China lavish so much attention on (storage systems, transportation infrastructure, tariffs, market development, finance, etc.) High population growth rates also left Ethiopia starved for the financial capital needed for overall agricultural system development, in particular roads. As a result, in good crop years, local crop prices collapse due to infrastructural inadequacies. Farmers are then unable to cover production costs and are unable to borrow, so they go bankrupt. In drought years, farmers meet the same fate, though for different reasons. The result has been huge areas of croplands lying idle while millions of Ethiopians starve.

Part [4C6]~ India (03S3) (06S6) ~

International lenders are also pressuring India into a bizarre combination of grain gluts and starvation (See Chapter 8 Section (8-D)). India is aggressively pursuing the conversion of labor-intensive to capital-intensive agriculture with a similar lack of attention to the functioning of the overall system. Corporations getting into agriculture in India receive tax-holidays, cheap credit, highly subsidized land, and excise duty relief. The more traditional family farmers must borrow money from private lenders at 130-460% interest and go to jail when they default. In the ten-year period between 1997 and 2006 as many as 166,304 farmers committed suicide in India (08N1). High suicide rates and rural despair helped to topple the previous Indian government in 2004 and put the current government in power (06S6). India has 550 million farmers and another 200 million agricultural workers. Conversions to capital-intensive agriculture typically reduce labor content by on the order of 95%. This implies a mass exodus of roughly 700 million people to the rings of slums surrounding India's cities. (About 2/3 of India's population lives in the countryside (06S6).) This will likely end up being the largest forced migration of people in all of human history. Ever-increasing price supports (government subsidies to grain farmers only) for grain production are producing ever-increasing tonnages of surplus food (currently 51 million tonnes). At the same time, international lenders have been pressuring India to eliminate subsidies for grain consumption (e.g. free food for starving Indians). The result has been a lot more hunger (currently 320 million people) and starvation while huge sums of government funds go for storing the surplus grain (which rots) and for grain price supports (subsidies) that enrich only wheat farmers (02W3).

About 15 years of globalization-related economic reform have:

All three of these "reforms" greatly increase the risks of non-grain farming in India (06S6) - risks that were very high to begin with. (Nearly 60% of Indian agriculture depends entirely on rain (06S6).) Indian non-grain farmers must now compete or go under. To compete they must buy high-cost (genetically modified) seeds, fertilizers and pesticides, but this and the other "reforms" makes them more vulnerable to moneylenders who compel farmers to:

Part [4C7]~ Russia ~

Efforts by the US treasury and the IMF to push the rest of the world into globalizing too quickly also led to disastrous premature attempts to privatize state-owned enterprises in Russia (02S5). The resultant chaos and anarchy resulted in large-scale looting of production facilities and other resources, near-economic-collapse, and feelings of hope deprivation and despair that promoted large-scale social disintegration in an environment of few, if any, safety nets. In contrast, some decades earlier, Germany underwent a major change in its system of government. That conversion took about a decade of carefully planned incremental changes but was far less traumatic and costly. Russia is now only beginning its recovery from its submission to ill-conceived external pressures from those promoting globalization.

Part [4C8]~ Southeast and Eastern Asia ~

Other victims of globalization were various national policies designed to stabilize local currencies against rapid fluctuations. Trade agreements pushed aside these rules, allowing for extremely rapid capital flows into and out of developing nations. One result was the boom in Southeast Asia in the early 1990s and the bust in 1997-1998 that spread to parts of eastern Asia. (See "A Recent IMF Study" below). Parts of Latin America were also hit hard. Hundreds of millions of people suffered from extreme economic deprivation in countries with little by way of economic "safety nets." Many nations are now insisting that future trade agreements not oppose national policies protecting nations against extremely rapid currency fluctuations.

Part [4C9]~ Latin America ~

Stiglitz (02S5) notes that, in Latin America, economic growth during the 1990s (2.9%/ year) was slower than in the days of trade protectionism in the 1960s (about 5.4%/ year) (02H2). Numerous economies in Latin America and the Near East recorded robust growth under import-substituting industrialization policies in the 1960s (03S2). Mexico's latest currency devaluation spread economic instability and hardship throughout much of Latin America - except to Chile. The Chilean government ignored the advice of globalization advocates and kept in place the various national policies designed to stabilize local currencies against rapid fluctuations (04J1).

Part [4C10]~ Japan's Experience in Resisting Globalization ~

Japan provides an interesting case study on the economic effects of globalization since it uses all sorts of covert procedures to resist globalization. Japan's trade barriers in 1989 were equivalent to 270% tariffs on food and beverages, 100% on textiles and light industries, and 130% for chemicals. Formal tariffs are a tiny proportion of the actual level of trade protection. Japanese trade barriers were at least as high in 1994 (Wall Street Journal (12/15/94)). In a way, Japan was almost forced to take this strategy since Japanese workers are among the highest paid in the world (Appendix B), and Japan is close to numerous economies characterized by vast pools of subsistence-level wage earners. Japan currently suffers from the bursting of a real estate bubble that is unrelated to globalization. But beyond that, it is doing well, according to an article for the British magazine Prospect by Tokyo-based writer Eamonn Fingleton in early 2003. His work is supported by that of Doug Stuck of the Washington Post Foreign Service.

Japan's economy is the most income-equal of the developed countries. Japanese consumers are probably the richest in the world. About 2.2 million more households now own a car than a decade ago. Domestic sales of sophisticated electronic equipment rose by 17.6% in 2002. Household ownership of video cameras grew 136% during 1990-2001. Japanese mobile phone subscribers increased from nearly zero in 1993 to 67 million in 2000. Every household has a color television, 90% has a microwave oven, 40% a computer and 39% a set of golf clubs. Unemployment has ranged from 4.5-4.9% - roughly similar to that in the US. The number of Japanese holidaying abroad rose from 8 million in 1989 to 14.6 million in 2000. Japan's life expectancy is the world's highest. Japanese work less hard than Americans to achieve higher incomes, more savings and better health. The average workweek is five hours shorter than Americans'. They also have lower tax rates - less than 20% vs. 26%. Yet health care is virtually free; and nearly every ward in the cities has a public swimming pool and playgrounds. Japan's rate of heart attacks is a third of that in the US, Japan's divorce rate is half of that in the US, the crime rate one-third and murder rates are one sixth of those in the US. Homelessness is rare in Japan (although growing). Japan also protects its labor prices by limiting immigration. Immigrants make up 1.2% of Japan's population (03B1).

Japanese financiers take a longer, and less speculative, view of their investment. They invest heavily in capital-intensive industry and infrastructure. A record 2.2 million square meters of new office space will be completed in 2003 in Tokyo - more than was contained in the Twin Towers. Tokyo's sewerage system has been transformed in the past decade. Japan manages her economy - both trade and investment - to suit her own long-term interests. Japan defies rules about opening trade in sectors where she is not competitive. She does not rely on foreign investment; for decades Japan resisted American attempts to open Japan's financial markets to foreigners. The result is a benign circle of expansion in which Japan has become a net exporter of capital. Japan's net foreign assets have nearly quadrupled in the past 12 years. Japan's current account surplus totaled $987 billion in the 1990s -2.4 times the total for the 1980s, when Japan was regarded as the 'unstoppable juggernaut' of trade. The yen has risen by 19% since the Tokyo financial crash. The savings rate was 14.9% of GDP in 2001, which means Japan accounts for nearly 30% of all new savings in the OSDC group of rich countries. Government debt fell from 6.0 to 1.6% of GDP between 1993-98. Only 6% of government debt is owed to foreigners; while the US borrows, abroad, $4 billion a day to finance its debt.

One of the reasons why Japan has had to resist the pressures of globalization so vigorously is shown in Table (4C-1) (below) comparing monthly wages in Japan and its huge nearby neighbor, China (Wages are in $US.) (Sources: National Bureau of Statistics, China; International Labor Organization; Wall Street Journal (9/27/04) p. R-11).

Table (4C-1) ~ Monthly wages in Japan and China

Year

1997

1998

1999

2000

2001

2002

2003

Japan

3753

3707

3628

3697

3697

3652

3737

China

60

71

78

88

98

111

126

Part [4C11]~ The EU's Experience with Globalization ~

Even though the nations of the European Union (EU) are all developed world nations like the US, EU nations' experiences with, and reaction to, globalization are significantly different from those in the US:

This might at first seem like a hopelessly impossible task for EU nations. In the long run it probably is. The strains are growing increasingly apparent. Economic growth rates are low. Unemployment is increasing, in some cases to socially and politically destabilizing levels. Some EU nations, particularly Spain, are chipping away at protections of wages and benefits. Also, jobs are increasingly on a contract basis and last for only a matter of weeks or months. Spanish workers on short-term contacts now account for 32.5% of the Spanish labor force, double the EU's average. The proliferation of short-term contract jobs has helped to cut Spain's unemployment rate from 20% to 9.4% over the past decade (05J1). By comparison, Germany's unemployment rate is 11.4%, up from 9.2% in 2001. In France, unemployment increased from 8.3% to 9.9% in the same period (05J1). Economic growth is also increased (Economic growth rates in 2005: US 3.5%/ year: Spain 3.2%/ year: Germany 0.8%/ year: France 1.5%/ year (05J1)).

However labor productivities are stagnant, wages are falling to minimum wage levels and benefits are vanishing. Productivity in Spain grew an average of 0.9%/ year between 1995 and 2004, vs. 1.7%/ year in Germany, 2% in France and 2.5% in the US (05J1). Short-term contracts explain the falling labor productivities. Why should an employer invest in worker training when that worker will be gone in a few months? Thus workers are frequently "between jobs" and since severance pay no longer exists and wages are meager, "between jobs" often translates to "wretchedness". Short-term Spanish workers often subsist on salaries barely above Spain's gross minimum wage (about $725/ month). The plight of Spain's short-term workers has created a new political buzzword: "precariousness" (05J1). Contract workers in Spain have been known to save money on electricity by feeling their way around their living quarters in the dark, and saving money by cutting out food items such as bread.

The Spanish work force is also being stratified - older workers have the long-term, high-paying jobs, while the younger workers (even college graduates) are low-paid contract workers. Over time of course, competitive pressures will decrease the pool of long-term jobs and increase the pool of contract jobs. Currently Spanish workers on short-term contracts are typically between ages 18 and 30 (05J1). Despite all the risks to the future, other EU nations are starting to follow in Spain's footsteps. The French Prime Minister issued a decree in August of 2005 allowing companies with fewer than 20 workers to lay off employees within 2 years of their hiring without any justification (05J1). Denmark has also liberalized its hiring and firing policies. Its unemployment rate has fallen 50% over the past decade (05J1). The German government, earlier in 2005, cut benefits to those unemployed for more than a year (05J1).

The US press keeps urging EU nations to become more like the US as they point to the EU's low economic growth and high unemployment. The US press contends that Europe needs more "labor market flexibility," including increased latitude of employers to fire employees, less regulation of business, lower payroll taxes, reduced public pensions, lower unemployment compensation, lower wages and employment benefits, and reduced influence of unions. They always ignore the non-sustainable US trade deficits, which ultimately must produce low wages, high unemployment, and low economic growth (or recession or worse) in the US. The reason why EU governments resist "reforming" themselves is voter resistance, as evidenced by the elections in Germany in the fall of 2005 and by the French and Dutch votes against the EU constitution (05W1).

US critics of the EU point to the EU's apparently lower living standards. The idea that European living standards are lower is based on the standard measure of per capita GDP (or income per person). This would be a reasonable approximation (ignoring the things that income doesn't measure, such as life expectancy or other health outcomes, or distribution) if Europeans worked the same number of hours as Americans. But they don't. France has a per capita GDP that is about 30% less than ours. But productivity -output per hour of labor - is actually higher in France than in the US (Ref. 3 of Ref. (05W1)). This means that if the French worked as many hours as we did, they would actually have more income than Americans (05W1). So they have chosen to take their productivity gains in the form of shorter hours, longer vacations, and more leisure time - something that the vast majority of typically over-stressed Americans can only yearn for.

The US argument that higher EU unemployment (currently 8% in the 15 high-income EU countries, as compared to 4.9% in the US) is a result of EU labor market protections is also lacking in economic evidence (Ref. 4 of Ref. (05W1))). There are a number of countries with high levels of labor market protections that have achieved low levels of unemployment: Austria (5.1%), Denmark (4.8%), Ireland (4.8%), the Netherlands (4.8%), and Norway (4.6%). There is no obvious relationship in general between various measures of labor market protection (e.g. unemployment compensation, coordinated bargaining, percentage of union members, protection from firing) and the unemployment rate (05W1). Europe's energy consumption per person is currently less than half that of the US. (Ref. 5 of Ref. (05W1)) Imagine the consequences of a reduction of more than 50% in US energy consumption on the US economy. The EU's successful, deliberate, planned reduction in energy consumption makes it far less susceptible to economic problems that are likely to befall the US as increasing energy demands from China, India, et al produce heavy upward pressure on energy prices. The EU also has fewer problems than the US in terms of poverty, health outcomes and inequality. If the EU were to "reform" in the ways recommended by US pundits, the EU's performance in these area would likely fall to that in the US.

The most absurd aspect of all this is that we have a nation with massive trade deficits (the US) telling the EU with its trade surpluses that it must "reform" to become more "internationally competitive." If trade surpluses provide a reasonable measure of international competitiveness, few, if any, developed world nations are less internationally competitive that the US.

The economic pressures on Europeans created by the need to compete with developing world folk earning a tenth or so of EU wages and benefits are now causing effects that reverberate throughout the economic and social structures of the EU. A fertility behavior project funded by the European Commission shows that more than half the people questioned would, on average, like at least two children. However, total fertility rates are now only about 1.4 children per woman in the EU, due to worries about the future, and the cost of raising children. The DIALOG project collected data from 30,000 people in 14 European countries on their attitudes and opinions concerning family numbers, fertility behavior and demographic change (06E1). Britain is suffering a baby "shortage" with potentially serious consequences as work pressures force young women to shelve plans for a family, according to new research. Women have not turned against becoming mothers and, if they could have the number of children they actually wanted, more than 90,000 extra babies a year would be born in the UK, according to the Institute for Public Policy Research. But the report says the high professional and financial penalties of childbearing mean many are delaying pregnancy until it may be too late to conceive. For example, a mid-skilled 24-year-old who gives birth will earn £564,000 less over her lifetime than a childless counterpart, as motherhood narrows her career options (06H1). The same basic phenomenon is ongoing in Japan. There, overwork is the most commonly cited reason why young Japanese shy away from having children. The result is a total fertility rate of fewer than 1.3 children per couple. Japan's workaholic trend has been getting worse in recent years. The Japanese now work longer than their counterparts in Britain, the US and Germany (06G1).

A recent major study (06A1) has focused on the transition to adulthood, a stage of the life cycle where young people face demanding life decisions, including the completion of education, finding stable employment, and establishing their household and family. The study dealt mainly with European nations, but from what has been noted elsewhere in this document, the conclusions appear to be applicable throughout the developed world. The study did not mention globalization but merely noted a marked change during the last few decades of the 20th century and thereafter. In this (globalization) period, the transition to adulthood in the European nations studied has not followed the pattern of the previous decades of the 20th century. Between the 19th and the mid-20th centuries, the transition to adulthood became more temporally organized and more predictable (76M1). In the 1950s and the decades immediately following, the transition to adulthood continued to occur in a reasonably ordered and predictable fashion, with all the constituent transitions taking place over the space of only a few years (76M1). However, the last decades of the 20th century and the start of the 21st century the European nations studied have seen the transition to adulthood in many countries becoming more complex and protracted - often in ways that leave young people particularly vulnerable. I.e.:

Even though Ref. (90A1) does not mention globalization specifically, the results of that reference makes it is hard to avoid the conclusion that the young adults of the western world are paying a huge price to maintain (somewhat) the competitiveness of the Western world in the global economy. That price seems certain to grow far larger over the decades to come. (Also see Section (3-A) [3A20].)

Part [4C12]~ The Developing World's Experience with Globalization ~

Some developing nations were able to avoid many of the pitfalls of globalization by ignoring the demands and basic philosophies of the IMF, the World Bank and the World Trade Organization (WTO). Several examples have been discussed above, e.g. China, Viet Nam and Chile. Other developing nations were less fortunate, often because they were in no position to ignore these powerful bodies (because of their staggering external debt), and often for fundamental problems like the scarcity of infrastructure and human capital. On the basis of foreign trade as a share of GDP, Africa's economy is one of the most open regions in the world, behind only East Asia. One might think then that Africa would be a major beneficiary of globalization. However, by any indicator one might examine - share of foreign direct investment and its trends, share of world exports and its trends, unemployment, poverty, infrastructure, trends in human capital development - there is no indication that Africa has benefited from globalization (05A5). This appears to be typical of all regions where extreme scarcities of human capital make it difficult or impossible to obtain technology transfers from foreign investors. The devastating effects of trade agreements calling for elimination of restraints on international currency flows have been noted elsewhere. The huge, precipitous currency devaluations in Latin America, Southeast Asia and elsewhere (and the resultant wretchedness) will probably make it difficult to pass future trade agreements requiring unrestrained currency flows - besides pointing up a fundamental flaw behind the basis principles on which the concept of globalization is based.

The IMF, the World Bank and the WTO used the leverage they had via their loans to developing nations and various globalization treaties to impose some extreme hardships on the most deeply indebted developing nations. They forced these nations to devalue currencies, privatize state infrastructure and services, remove import controls and food subsidies, charge consumers the full cost of health- and education services and generally downsize the public sector. These imposed policies are often collectively termed "Structural Adjustment Programs" - SAPs. It is interesting to note that protectionist tariffs and subsidies were the mechanisms used by today's wealthy nations to climb from agriculture-based economies to economies based on urban, high-value goods and services (03C2). The developing world is being denied the use of this same mechanism. The UN's major study of urbanization (03U4) concluded that the main single cause of increases in poverty and inequality in developing nations during the 1980s and 1990s was the "retreat" of the state (i.e. privatization). The middle class disappeared, and the brain drain to oil-rich Arab countries and to the West increased dramatically (95B1). In Africa, SAPs resulted in capital flight, collapse of manufactures, marginal or negative increases in export income, drastic cutbacks in public services, soaring prices, and steep declines in real wages (97R3). SAPs devastated rural smallholders by eliminating government subsidies and pushing them into global commodity markets that were dominated by Developing World agribusinesses (which are often subsidized by their governments) (00B3). Developing world economies tend to be predominantly (e.g. 70%) agriculture-based. Hence, during the past few decades, SAPs have caused mass migrations to the wretched slums that ring nearly all large urban areas in developing nations (08S1). (See data below.)

Some data on the scale and trends for slums ringing large urban areas in the developing world:

One should hasten to argue that the developing world's subsidies of food, education, health-care, utilities, etc. were financed largely by borrowing from external sources. Hence they were not sustainable and were bound to collapse anyway. The real mistake was that the IMF, World Bank and WTO viewed these subsidies as "bad economics" caused by "bad government" (at least according to one author of Reference (03U4)). They therefore concluded that, by removing these subsidies, developing world economies would become more "efficient." This, they allegedly believed, would improve the lives of developing world people. The real cause of the external loans and the subsidies they financed was the extreme financial capital scarcity cause by the costs of infrastructure growth necessitated by population growth. So it would have been just as hard for developing world folk to pay the unsubsidized cost of food, health care, education and utilities as to repay their massive external debts. Both options were impossible, so SAPs and trade liberalization simply bought the non-sustainability issue to a head sooner, but otherwise accomplished nothing for those nations having nothing to offer the global marketplace but unskilled labor.

Numerous experts knew that "bad governments" were only marginally relevant, and that the financial demands of population growth were both the main culprit and the cause of "bad government." Billions of people have been paying a terrible price over the past two decades for this largely ideology-based "error." What is even more tragic is that population growth could have been greatly reduced by relatively insignificant investments in contraception, family planning, and the marketing of the virtues of small families etc. and greatly increased the probability that the external debt of the developing world would be paid off.

"Informalization:" This is not the first time for the above. During the late Victorian globalization (1870-1900) a huge number of subsistence peasantries of Asia and Africa were forcibly incorporated into the world marketplace. Millions died of famine, and tens of millions more were uprooted from traditional lifestyles. Latin America saw the creation of a huge class of increasingly wretched semi-peasants and farm laborers who lacked any sort of secure means of subsistence (01D1).

The major UN study of urbanization (03U4) concluded that, in modern times, instead of becoming a source for growth and prosperity, SAPs and "trade liberalization" (globalization) have caused cities of the developing world to become "dumping grounds" for surplus populations working in unskilled, unprotected, and low-wage "informal" service industries and trades. The huge growth of this "informal" labor sector was concluded to be a direct result of "trade liberalization" (globalization) (p. 40 and 46 of Ref. (03U4)). This global "informal" working class is now almost one billion strong: making it the fastest growing and most unprecedented social class on earth. According to the UN study of urbanization (03U4), "informal" workers are now about 40% of the economically active population of the developing world. (See Table (4C-2) below.) During 1994-2000 "informal" employment accounted for 72% of nonagricultural employment in Sub-Saharan Africa (84% of female nonagricultural workers) (05A5). What is particularly tragic about this is that labor laws and standards do not protect these already wretched "informal" workers. In Latin America, both state employees and the more formal work force have declined in every country of the region since the 1970s, while the "informal" sector of the economy has dramatically expanded (03P2). If someone is looking for a cause of the leftward drift of Latin American politics in recent years, they might want to ponder the effects of the growth of the informal sector there.

Table (4C-2)~ The Informal Economy as a Percent of the Official GDP.
Data are from the years 1999-2000 (06R2). Source: IFC

Sub-Saharan Africa

42 %

Latin America and the Caribbean

41 %

Europe and Central Asia

37 %

Southern Asia

36 %

Middle East and North Africa

27 %

East Asia and Pacific Region

24 %

OECD (high income countries)

17 %

The UN study of urbanization (03U4) estimates that 90% of urban Africa's new jobs over the next decade will come from the "informal" sector. This same UN study cites research finding that "informal" economic activity now accounts for 33-40% of urban employment in Asia, 60-75% in Central America and 60% in Africa. In Malawi, only 50,000 people out of a population of 12 million have "formal" jobs in the private sector (06R2). Incomes generated from "informal" enterprises usually cannot support even a minimum living standard. Informal enterprises involve little capital investment, virtually no skills training, and few opportunities for expansion into a viable business since the needs of bare survival require any income that is received. Economists are puzzling over how "informal" workers even manage to exist. For large swaths of Africa, where about 200 million people live, today's average per-capita income is less than it was during the US presidency of John F. Kennedy (06M3). Almost half of the 750 million sub-Saharan Africans live on less than $1/ day (06R2).

A large group of developing nations, from Latin America to Africa to the former Communist countries has experienced a quarter-century of decline or stagnation, punctuated by civil wars and international conflicts. They experienced deterioration in living standards as key social services became privatized and more costly (e. g. water in Cochabamba, Bolivia and Trinidad, and electricity in Argentina and Chad). To add insult to injury, Western pundits often arrive in developing nations by jet, stay in luxury hotels, and hail the obvious worsening of economic and social conditions as a step toward better lives and international integration. For many people in Latin America and Africa, globalization appears to be nothing more than a new and more attractive label for the old imperialism or for re-colonization. The recent leftward tilt of Latin American politics may be one byproduct of this (06M3).

Informalization of the developing world's labor force is even affecting the religious makeup of much of the developing world. Pentecostalism has been growing into the largest self-organized movement of urban poor people (the "informal" work force) in the developing world. Much of its appeal appears to come from people helping each other survive in the lowest economic levels of the developing world where even the median income barely funds subsistence. According to Wagner (97W2) "In all of human history, no other non-political, non-militaristic, voluntary human movement has grown as rapidly as the Pentecostal-Charismatic movement in the last 20 years." Pentecostalism has grown to include 25% of Christians worldwide - about 0.5 billion people (06G4). "Renewalists" (an umbrella term covering Pentecostalists and Charismatics) now comprise 49% of the population of Brazil, 30% of Chile, 60% of Guatemala, 56% of Kenya, 26% of Nigeria, 34% of South Africa, 44% of the Philippines (06G4), and 5% of India. These data roughly parallel the data in Table (4C-2). The trend in the more established religions has been in the opposite direction. The Christian, Muslim, and Jewish religions got their start by providing "safety nets" where none existed before. Yet Latin America's Catholic church now seems more concerned about the welfare of the quasi-feudal lords than the region's wretched, hope-deprived peasantry. Several thousand verses of the Bible stress the importance of charity. Yet the more fundamentalist and evangelical churches in the US seems far more concerned about issues such as the legitimacy of gays and family planning - issues the Bible scarcely mentions.

Part [4C13]~ The 50 Least Developed Countries ~

The 50 Least Developed Countries (LDCs) contain over 10% of the world's population (06P4) - about half as many people as the number found in the developed world, and hardly a category that can be ignored. LDCs have embraced globalization quite completely. Very few LDCs have restrictive trade regimes, and most have undertaken rapid and extensive trade liberalization. During the 1990s, many LDCs engaged in significant and far-reaching economic reforms, including extensive trade liberalization, financial liberalization and privatization (06P4). This is surprising because their existing production and trade structures offer very limited opportunities in a rapidly globalizing world driven by new knowledge-intensive products with demanding conditions of market entry. Also, opening their more traditional sectors (e.g. agriculture - typically on the order of 70% of their GDP) exposes existing LDC enterprises to an unprecedented degree of global competition (e.g. from heavily subsidized agricultural products from the developed world).

The logical explanation for the 50 LDCs embracing globalization in their current situation is that the IMF, the World Bank, and the WTO used the leverage offered by the typically huge external debt of the LDCs to coerce them to embrace globalization. The thinking of the IMF, World Bank and WTO probably was that the change would make the LDC economies more "efficient," resulting in enhanced GDPs - plus a greater likelihood of external debts being repaid. As noted in Section (4-C) [C12] this ideology typically produces the opposite result. The obvious consequence of globalization is that more and more people in the LDCs are seeking work outside agriculture, and urbanization is accelerating. For the 50 LDCs as a group, 2000-2010 is going to be the first decade in which the growth of the economically active population outside agriculture is predicted to be greater than the growth of the economically active population within agriculture (06P4). This transition will affect more than half the LDCs during 2000-2010 and more during 2010-2020. The 50 LDCs must somehow manage this transition in an open-economy context (06P4).

The 48 countries identified by the UN as "least developed" are expected to triple their population by 2050. Few other countries even come close to fertility levels of this magnitude. There is also a link between high population growth rates and external debt. Of the 41 countries designated as "heavily indebted poor countries" by the World Bank, 39 fall into the category of high-fertility nations, where women, on average, bear four or more children (02H5). So it seems clear that there is a strong linkage between being "least developed," being both heavily indebted and poor, and having high population growth rates. There are good reasons for these three characteristics being linked. High population growth rates require large amounts of financial capital for the necessary infrastructure growth needed just to accommodate the new citizens. The resultant financial capital deprivation leads logically to human capital deprivation, heavy indebtedness and huge unmet needs for infrastructure. Hence the "least developed" status.

The notion that a dose of globalization-based efficiency improvements is all that the 50 LDCs need to get their houses in order is a tragic misconception. Foreign direct investment (FDI) inflows into the 50 LDCs remain oriented towards exploiting extractive sectors (e.g. oil) -not a good way to accommodate the needs for large-scale job-creation required by rapidly expanding populations. External debts of the LDCs continue to increase, in spite of major debt relief measures (06P4). This is understandable. The main industry of the LDCs, agriculture, cannot compete with heavily subsidized imports from developed nations. Hence, huge trade deficits are all but guaranteed. To make matters worse, in spite of special market access initiatives, the proportion of total developed country imports from LDCs admitted free of duty declined from 77% to 72% between 1996 and 2003 if oil and arms imports are excluded (06P4).

The ratio of gross domestic savings to GDP, which is already much lower in the LDCs than in other developing countries, declined from 13.4% in 2003 to 11% in 2004 (06P4). During that period, the LDCs' reliance on external finance savings to finance capital formation increased. A large share of the increase in ODA (Official Development Assistance) is attributable to debt relief and emergency assistance, which together accounted for 35% of total net ODA disbursed to LDCs in 2003 and 27% disbursed in 2004 (06P4). This is hardly what would be expected of countries in the process of getting their acts together via globalization-induced efficiency improvements.

Real per-capita GDP increased by 0.72%/ year for the 50 LDCs as a whole during most of the globalization era (1980-2003). For the 41 LDCs for which data are available, 17 had negative average annual per-capita GDP growth rates over this period. In only 9 LDCs the average annual GDP per-capita growth rate exceeded 2.15% during 1980-2003, which was a rate sufficient for their per-capita income to be converging with that in high-income (OECD) countries (06P4). Of the 40 LDCs for which data are available, only 7 experienced steadily sustained growth. All the other LDCs experienced economic contractions of varying duration and severity since achieving political independence (06P4). Of the 33 LDCs that have experienced economic crises with major output losses, only 12 had real GDP per-capita that is now higher than it was at its peak in the 1970s or early 1980s. The other 21 LDCs have experienced growth collapses in the sense that their real GDP per capita in 2003 was lower than it was 20-30 years earlier (06P4). Eleven of those 21 LDCs have simply not recovered at all from the growth collapse (06P4).

Rates of human capital formation in the 50 LDCs during the 1990s were slower than in other developing countries (06P4). However this probably reflects differences in population growth rates and consequent financial capital scarcity, not just the effects of globalization.

Gross domestic savings in the LDCs rose to 13.6% of GDP during 1999-2003. But with this savings rate it is impossible, without external capital inflows, even to achieve positive rates of per-capita GDP growth (06P4). Estimates of genuine savings, which take account of capital depreciation and natural resource depletion, also indicate that, without ODA grants, there were negative savings for all years between 1991 and 2003, and that the genuine savings rate, without ODA grants, also declined (06P4).

Industrial activities expanded from 23% of the GDP in 1980-82 to 26% of GDP in 2000-03 in the 50 LDCs. The corresponding figures for service activities were 39% and 42% (06P4). But much of the increase in industrial value-added is concentrated in a few LDCs. The types of industrial activities that are expanding most in the 50 LDCs are mining, exploitation of crude oil, and generation of hydroelectric power rather than manufacturing. Primary commodities (natural resources) contributed about two thirds of total merchandise exports of the 50 LDCs in 2000-03 (06P4). Whatever shift into manufacturing has occurred in the LDCs is concentrated in low-skill, labor-intensive products, particularly garments, which have often developed to take account of "special preferences." These "preferences" are now vulnerable as a result of the end of the Agreement on Clothing and Textiles. That will force the LDCs to compete head-to-head with China (06P4). There has been a very limited upgrading (processing - typically far more labor-intensive) within primary commodity exports (natural resources). For the 50 LDCs as a group, the share of processed minerals and metals within total mineral- and metal exports fell from 35% to 28% during the 2 decades between 1980-83 and 2000-03. The share of processed agricultural goods within total agricultural exports decreased from 23% in 1980-83 to 18% in 2000-03 (06P4). All this would suggest that the labor contents of the LDCs' exports of minerals, metals, and agricultural products have been dropping during the globalization era - something that might have been imposed on the LDCs by the trade agreements they signed, since LDC wages tend to be at subsistence-level or lower (in the "informal" economy).

The types of services that are expanding most in the LDCs are low-value-added and survivalist petty trade (i.e. in the "informal" economy instead of the formal economy) and commercial services (06P4). Non-agricultural value-added per non-agricultural worker in the 50 LDCs declined by 9% during the two decades of globalization between 1980-1983 and 2000-2003 (06P4). Nowhere in the figures in this, and the previous, paragraph can any positive benefit of globalization be seen. In fact, the replacement of much of the "formal" economy by the "informal" economy, and all the wretchedness and hope-deprivation that this replacement entails, suggests a significant deterioration of the human condition as a result of (and during) the globalization era. One might argue that the extremely high rates of population growth probably would have bought this trend about anyway. Those who argue this perspective should take note, however, that the IMF, the World Bank and the WTO are easily capable of reversing this population trend, and with investments that would have been miniscule relative to the Official Development Assistance (ODA) grants that have been lavished on the 50 LDCs in recent decades.

Almost all the 50 LDCs show extreme imbalances between the rate of growth of the labor force, which is very rapid owing to population growth, and the rate of capital accumulation and technological progress, which is generally slow as a result of the demands on financial capital created by the infrastructure needs created by population growth. As a result, most LDC workers must earn their living using their raw labor, with rudimentary tools and equipment, little education and training, and poor infrastructure. The results are low labor productivity and widespread underemployment. This is the basic cause of persistent mass poverty in the 50 LDCs (06P4). Little wonder then that the 49 countries designated by the UN as least developed countries received only 0.5% of US FDI in 2001, almost no change from the late 1980s (04K3). Also these 49 countries are responsible for less than 1% of total US trade (04K3). The total labor force of the 50 LDCs is estimated at 312 million people in 2000. During 1990-2000, the labor force increased by 71 million, and during 2000-2010 it is expected to grow by a further 89 million to 401 million people (06P4). Nearly all of this labor force growth is expected to be in urban areas.

The most important way in which labor has found productive work within the 50 LDCs over the last 25 years has been through agricultural land expansion. But this is becoming increasingly difficult. Increasing the amount of arable land brought into cultivation in the LDCs increases the dependence on fragile lands (such as arid regions, steep slopes, and fragile soils). This creates problems because extreme poverty makes it difficult for agriculturalists to use sustainable agricultural practices. Croplands degrade and soil fertility declines, particularly because inadequate transportation infrastructure makes imported chemical fertilizers too expensive. In 31 LDCs, over 30% of the population live on fragile lands (06P4). Land under crop cultivation per person engaged in agriculture is declining. For the 50 LDCs as a group, the average size of the cultivated holding per economically active agriculturalist has fallen by 29% over the last four decades. For the 50 LDCs as a group, the average farm size in 2000-2003 was 0.69 hectares (06P4) - barely enough to satisfy the food needs of the farm family. This raises the question of how those in the exploding urban areas of the LDCs going to pay for the required food imports without further loans from external sources.

Solving the above-mentioned fundamental problems of the LDCs with the "efficiencies" that the IMF, the World Bank, and the WTO believe that globalization imposes could not possibly work, and the data above only bear this out. Milanovic (05M2) has examined various theories as to why the poorest countries are failing to catch up, economically, with the rest of the world - which is what some theories of the effects of globalization say should be happening. His study is summarized in Section (4-D) [4D4] below. Milanovic found the main reason for this failure to be involvement in wars and civil conflicts (05M2) - not a very useful conclusion. His work could have had significant value had he just gone one step further and examined the close, and direct, linkage between the frequency of civil conflicts and population growth rates shown in Table (8D-1). This could have led the IMF, the World Bank and the WTO to abandon their misguided ideology and pursue population growth reduction strategies that could have put the 50 LDCs well along on a path leading to developed-nation status.

Part [4C14]~ Cambodia ~

Cambodia is typical of the poorer developing world countries that have joined the World Trade Organization (WTO). As is widely recognized, globalization has not been kind to this category of country. Population growth rates are high; so there is insufficient financial capital generation to create the human capital needed to provide anything other than unskilled labor to the global economy. For these people, wage scales are subsistence level, making generation of financial or human capital virtually impossible. About 80% of Cambodians work in agriculture - typical of poorer developing world countries. Before it joined the WTO in 2004, impoverished Cambodians agreed to expose their farmers to more competition that the wealthy EU and the US were willing to accept for theirs (06W1).

In a 152-page report released in late June of 2006, the UN Development Program (UNDP) disputes the US position that removing trade barriers is the surest way to reduce poverty. Instead the UN advises poor Asian countries to do what Japan and South Korea did successfully in the 1970s and 1980s: protect key industries (in this case, agriculture) temporarily with tariffs before exposing them to foreign competition (06W1). Unfortunately the poorer of developing nations lack both the negotiating skills and political clout to pull this off, and their staggering external debt gives them a weak hand to start with. The Internal Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) have overwhelming influence over countries with large external debts, and these organizations take a dim view of tariffs, thus giving the US and EU the upper hand in any trade negotiations. The result of all this: huge trade deficits that poorer developing nations like Cambodia can ill-afford. (They cannot afford to subsidize their agriculture to anywhere near the extent to which the US and the EU subsidize theirs.)

The UNDP says Asia's poorest countries have been left behind even as trade has exploded across the region. From 1980 to 2000, tariffs fell from an average 34% to 8% in East Asia and the Pacific, and from 60% to 18% in South Asia. As tariffs came down, trade boomed - rising from 45% of Asia-Pacific economic activity in 1990 to 81% by 2003. The region now accounts for about 30% of world exports, a figure the UNDP believes could hit 50% within a decade. But across Asia, job growth fell from 337 million in the 1980s to 176 million in the 1990s, not even fast enough to keep up with population growth. Increasingly, the UNDP says, expanding global trade is creating jobs for skilled laborers, but not for uneducated rural Asians who can no longer make a living on the farm (because of heavily subsidized farm imports from the US and EU). The UNDP now urges poor Asian countries to impose tariffs on farm imports to protect their own farmers (often 70% or more of the economies of poor Asian countries) and food supplies (06W1).

The IMF and World Bank are thus shooting themselves in the foot, and decreasing the likelihood of ever receiving repayment of developing nations' external debt. They would do far better by providing relatively cheap family planning assistance that would have reduced the costs of the infrastructure needed to accommodate population growth. This would allow for the formation of financial and human capital that would have enabled countries like Cambodia to develop technologically advanced industries and improved ability to pay down their external loans - much like the most successful of the nations of eastern Asia.

Part [4C15]~ South Korea's Experience with Globalization ~

Compare Senegal to South Korea. Both countries had a GDP per capita of US$ 230 in 1960. South Korea is now a hi-tech leader supplying components for America's computer industry and sees a per-capita GDP of $US 8910. Senegal, on the other hand, has barely improved, with GPD per capita now at US$ 260. Blighted by debt, conflict and unfavorable geography, Africa's future seems to be at a disadvantage compared to East Asia. While South Korea was allowed to protect its infant industries from being overwhelmed by more mature competitors, the International Monetary Fund and the World Bank required Africa to open up its largely agricultural markets (02U3).

Protectionist barriers are still a key defense for South Korea, and have helped in its transformation from one of the world's poorest countries in the 1960s to one of the richest. South Korea was mired in poverty for years after the Korean War in the 1950s. A military dictator built a modern economy in the 1960s and 1970s by assigning large companies to build different parts of the economy and protecting them with large import duties. In 2006, South Korea was the world's 10th largest economy. It seems clear that South Korea achieved its impressive economic success by violating the conceptual bases of globalization - not by subscribing to them, as some would argue. Now, as trade barriers trend downward, South Korea is starting to suffer from the effects of globalization. The South Korean economy grew by 8-9%/ year for much of the 1990s, but its growth has recently slowed to 5%/ year. A key reason is that China is taking away South Korea's lead in low-cost manufacturing, and it now threatens South Korea's higher-value industries (07R1). South Koreans are now also feeling the financial stresses created by globalization. Among the major reasons mentioned for South Korea's low birth rate are instability of employment, and difficulty in meeting expenses involved in child-rearing ("South Korea: one in 3 Married Women Rejects Motherhood," Korea Herald (3/23/06)).

Part [4C16]~ Conclusions ~

The above case histories offer compelling evidence that the linkages between economic growth and globalization are often totally opposite to the conclusions drawn by advocates of globalization. Success stories are often more a result of anti-globalization policies, while massive hardship and economic instability have resulted from blindly conforming to policies advocated by proponents of globalization. This same viewpoint has been argued at some length by Bello (04B3) who is a professor at the University of the Philippines, and who describes the history of globalization from the perspective of the developing world. The following paragraph is from Bello's paper.
"... An intensely ideological doctrine has formed in recent years that only aims at the removal of so-called trade barriers and limitations on capital traffic. The single-minded credo is: Prosperity arises automatically in the unhindered play of market forces by its supposedly effective 'invisible hand'. However the historical truth is very different. In all the economically successful countries, whether Germany, the US, Japan or South Korea, the state played a central role in the process of economic development. In all these cases it was the state that promoted targeted national economic output and actively encouraged the development of national economies. This was accomplished by conscious control of trade, and regulation of the markets through protectionist measures." The case histories described above, whether the outcomes of globalization were good or bad, give ample support to Bello's argument.

SECTION (4-D)~ SOME NON-OPTIMISTIC STUDIES ~ [4D1]~The Clark-Mander Study, [4D2]~The Weisbrot et al Study, [4D3]~A Recent IMF Study, [4D4]~The Milanovic Study, [4D5]~An Emerging Picture

Part [4D1]~ The Clark-Mander Study ~

A recent study (01C1) examined the impact of economic globalization on poverty alleviation and other indicators of human well-being. It refutes repeated claims by leaders of Bretton Woods institutions - the World Bank, IMF, WTO and government officials - that globalization helps the world's poor. The report concentrates on the three decades of globalization's most rapid growth and finds that the outcomes for the poor were exactly the opposite of what is claimed by globalization advocates, and in fact finds that globalization policies have contributed to increased poverty, increased inequality between and within nations, increased hunger, increased corporate concentration, decreased social services and decreased power of labor vis-à-vis global corporations. The first section of the report provides 7 indexes with more than 100 quotes from prior reports - quoting such sources as the World Bank, the UN and the US CIA - demonstrating globalization's negative impacts on economic and social well-being. The second half of the report explains why different components and institutions of economic globalization intrinsically led to these negative outcomes (www.igf.org/).

Part [4D2]~ The Weisbrot et al Study ~

Another study by Weisbrot et al (01W1) demonstrates the incongruities between the alleged economic growth (GDP/ capita) benefits of globalization with actual changes in people's lives worldwide during globalization. Weisbrot et al examined all available national data on the issues of real per-capita GDP, life expectancy, mortality rates, and expenditures on public education, literacy rates, and school enrollment during 1960-2000. They compared rates of improvement for 1960-1980 (effectively pre-globalization) to those for 1980-2000 (effectively the period of significant globalization). They made the comparison for five groupings of nations, the worst 20% (typically the poorest of the developing world) through the best 20% (typically nations of the developed world). The results of these comparisons are tabulated in Table (4D-1) (below) taken from charts that are based largely on World Bank data.

Table (4D-1) ~ Some Key Changes in Social/ Economic Indicators during 1960-2000 (01W1)

National Grouping

LOWEST 20%

SECOND 20%

MIDDLE 20%

FOURTH 20%

HIGHEST 20%

Average Annual Change in Real Per-Capita GDP (%/ year)

1960-1980

1.9

2.1

3.6

3.4

2.6

1980-2000

-0.5

0.8

0.9

1.2

1.8

Average Yearly Improvement in Total Life Expectancy (years)

1960-1980

0.40

0.56

0.42

0.20

0.16

1980-2000

0.32

0.18

0.38

0.18

0.19

Average Yearly Change in Infant Mortality (per 1000 Live Births)

1960-1980

-0.5

-1.0

-1.9

-2.6

-2.8

1980-2000

-0.4

-0.9

-1.6

-1.9

-2.6

Average Yearly Change in Child Mortality (under Age 5) (per 1000 Live Births)

1960-1980

-0.6

-1.2

-3.2

-3.8

-4.9

1980-2000

-0.5

-1.2

-2.4

-3.2

-4.2

Average Yearly Change in Total Public Spending on Education (% of GDP/year)

1960-1980

0.10

0.091

0.098

0.075

0.021

1980-2000

0.07

0.064

0.080

0.006

-0.016

Average Yearly Change in Literacy Rates (percentage points)

1960-1980

1.14

1.17

0.94

0.66

0.03

1980-2000

0.83

0.87

1.10

0.63

0.17

Average Yearly Change in Total Primary School Enrollment (percentage points)

1960-1980

1.95

1.80

0.30

-0.10

-0.43

1980-2000

1.05

1.10

0.32

-0.13

-0.57

Average Yearly Change in Secondary School Enrollment (percentage points)

1960-1980

0.80

1.45

1.92

1.60

0.75

1980-2000

0.81

0.80

1.30

0.80

0.60

Average Yearly Change in Tertiary School Enrollment (percentage points)

1960-1980

0.12

0.51

0.53

0.66

0.76

1980-2000

0.07

0.14

0.47

0.68

0.85

The results in Table (4D-1) are overwhelmingly in one direction: in every category, the comparisons show diminished overall progress in the period of globalization as compared with the two prior decades. As Weisbrot et al (01W1) note, this evidence does not prove that policies associated with globalization were responsible for the deterioration in performance. But it does present a strong prima facie case that some structural and policy changes implemented during the past two decades are at least partly responsible for these declines. Table (4D-1) certainly gives no evidence that policies associated with globalization have improved outcomes for developing countries (01W1). A paper by Rodrik (01R1) agrees, concluding: "Neither economic theory nor empirical evidence guarantees that deep trade liberalization will deliver higher economic growth. Economic openness and all its accouterments do not deserve the priority they typically receive in the development strategies pushed by leading multilateral organizations."

(The China Example) One might imagine that China, perhaps the world's biggest beneficiary of globalization, would surely be exempt from the trends shown in Table (4D-1) above. Instead, China's experience fits well into the trends of Table (4D-1). In 1975, 85% of China's rural residents had community-financed health care. Today 10% do. In 1991, 39% of China's total health-care expenditures came directly out of pockets of individual citizens. By 2000, individuals paid directly for 60% of China's health-care costs. Through the 1990s, Chinese farmers' incomes roughly tripled, but medical costs increased more than 8-fold. Life expectancy in China increased from less than 40 years in 1950 to 69 years in 1982. But during the ensuing 20 years, life expectancy increased by only one year (03W1).

Until the beginning of the early 1980's, China's socialized medical system, with "barefoot doctors" at its core, worked public health wonders. Since then, China has privatized vast swaths of the economy and shifted public health resources toward the cities. The collapse of China's socialized medicine and cost increases has opened a gap between urban health care and rural health care. In less than a generation, China's rural population has gone from 0% uninsured to 79% uninsured (in terms of health care) (06U4). More than 50% of urban residents enjoy coverage, supplied by their employers. The failure to provide decent health care for peasants has reinforced the idea of China as two separate nations: one urban and increasingly comfortable, the other rural (about 80% of China's population) and increasingly miserable. Unable to afford proper care, the first recourse of most rural peasants when they fall ill is to take whatever drugs they can find on the market to relieve their symptoms. Often they merely get worse, or they spread their disease to others. Once a peasant's illness becomes debilitating, his/her relatives can face the decline of a breadwinner, and medical bills steep enough to bankrupt the family (06U4). The effects shown in Table (4D-1) above reflect this.

Part [4D3]~ A Recent IMF Study ~

A major International Monetary Fund study (03P1) of the economic effects of globalization on developing countries examined 79 developing countries during 1962-97. It includes a comprehensive review of the global literature on the subject. It examined the overall issue in terms of its six most basic components:

Economic (GDP/ capita) growth and consumption growth, they reasoned (or discovered), are quite unrelated issues. Economic growth could reflect a huge component of multinational corporation income, and little or no economic benefits to the developing world's typically subsistence-level labor. Consumption growth (as measured by such key parameters as infant mortality and life expectancy) measures the degree to which the public at large in developing countries benefits from globalization. This format for the analysis of the economic aspects of globalization appears to be the most advanced of any analysis of globalization to date. They found that:

Part [4D4]~ The Milanovic Study ~

Milanovic (05M2) examined various theories as to why the poorest countries are failing to catch up, economically, with the rest of the world - which is what at least some current theories of the effects of globalization say should be happening. In fact, the poorest countries have been falling further behind the middle-income and rich countries. The median per-capita growth of the poorest countries during the past 20 years has been zero. Milanovic examined the following popular possible explanations of this:

Milanovic showed that the first three of these explanations offer no explanation for why the poorest countries have been failing to catch up with the rest of the world during 1980-2002. The main reason for this failure was found to be the fourth explanation - involvement in wars and civil conflicts (05M2).

What Milanovic failed to do was to consider population growth rates as a fifth possible explanation for the failure of the poorest countries to catch up with the rest of the world economically. Nor did he examine what possible effect population growth rates may have played in the greater likelihood of poor countries being involved in wars and civil conflicts. Had he done this, he would have noted that the region of the world with the highest population growth rate (the Muslim world) was the scene of the overwhelming bulk of the world's wars and internal conflicts. He would also have noted that the region of the world with the second highest population growth rate (Africa) was the scene of the bulk of the remaining wars and internal conflicts. His conclusion would then have almost certainly have been that wars and civil conflicts are the main reason why the poorest countries are falling further and further behind the rest of the world (as he did conclude) but also that population growth was the primary cause of these wars and civil conflicts (which he did not do because he failed to consider that possibility). Milanovic's conclusion about wars and internal conflicts is of little value in terms of devising strategies for addressing the problem. On the other hand, a conclusion as to the effects of population growth rate could have led to numerous cheap and effective strategies for solving the economic problems of the world's poorest countries and starting them off on the path to developed nation status.

Part [4D5]~ An Emerging Picture ~

A brief summary of the above produces the following observations for the developing world:

Observations for the developed world include the following:

All this would suggest that whatever good intentions (if any) may have formed the bases of the rules of globalization and the edicts of its most influential advocates, something has gone terribly wrong with the application of these to a complex, bipolar world. This might be easier to understand if the issue of "good intentions" was given closer scrutiny. In this document (Section (1-B)[2] and Chapter 9), the "good intentions" issue is examined. It appears that the trade rules defining the push toward globalizations past and present were never based on some bold and visionary scheme for overall human betterment. Instead they appear motivated, to a far greater degree, by a quest for ever-increasing wealth and power by multi-national corporations and closely related interests. This is as it was during 19th century globalization. Concepts like democracy, government openness, human rights and the regulations attempting to maintain the integrity of life-supporting natural capital are seen as acceptable only if they do not inconvenience world trade. Such a scheme is probably destined to fail catastrophically; yet it rides on the coattails of a virtually unstoppable process of mobility growth. If all of the above represents the effects of early-stage globalization, then one might reasonably expect, over time, economic meltdowns that would threaten the economic, social and political stability of the developed world.

SECTION (4-E)~ THE OUT-SOURCING-IN-SOURCING ISSUE ~
This subject is now treated in a companion document (06S2).

SECTION (4-F)~ BLAMING TYPE B GLOBALIZATION OR BLAMING ITS CONTEXT - AND DOES IT MATTER?

The problem with blaming the effects shown in Table (4D-1) on Type B globalization (defined in Section (1-D)) is that other major global changes are occurring over much the same time frame as Type B globalization. These are far broader changes that provide a context for Type B globalization. Among these charges are:

  1. Extreme and growing external debt loads in the developing world;
  2. Elimination of significant untapped reserves of natural capital in developing nations that could be adapted to sustainable production of food, fiber and water (08S2);
  3. Conversions of developing-world agriculture and fishing from labor- to capital-intensive operations, eliminating roughly 95% of the labor requirements per unit of resource or output (e.g. land, tons of fish caught) - no small consideration in largely subsistence-level economies.

Change (3) occurred in the early days of what are now developed nations. It played a major role in enabling the conversion to modern-day developed world living standards (Chapter 5). However then Change (3) was occurring in the absence of Changes (1) and (2), so assuming the same beneficial outcome for the current developing world is far from assured (Chapter 5). Note too, that Changes (1) - (3) all refer to the developing world, while Table (4D-1) (Column 6) and the related changes listed in Section (3-A) include the developed world. Blaming Type B globalization for globalizing joblessness, labor prices, working conditions, mass migrations to slums ringing urban areas, the essentially infinite pools of subsistence-level labor, the social, economic, political and military instabilities, the lack of financial capital needed for creation of human capital and a long list of others is tempting. But one would find it difficult to explain why the context of Type B globalization (defined above) should therefore be held blameless.

Many, if not all, of the effects in Table (4D-1) are easy to relate directly to demands by the World Bank, the IMF and others that developing nations reduce their subsidies for consumption (e.g. of food, water, bus rides, health care and even primary education) as one price of future loans and access to world markets via trade agreements. At the same time these demands are being made, blind eyes are being turned away from subsidies in the form of price supports for such things as food production. The results of subsidizing production, while withdrawing subsidies for consumption, are not hard to deduce. In India, for example, the results have been rising food prices, increasing production, decreasing consumption, falling water tables, tens of millions of tons of rotting wheat, hunger, starvation and surplus wheat storage costs that exceed the amount of money that the Indian government spends on agriculture, rural development, irrigation and flood control - combined (02W3). Gross blunders such as this are possible, in theory, to correct. If they were corrected, the problems listed in Table (4D-1) would be reduced. But then the rate of growth of developed-world external debt would become even higher since loans would be needed to cover the bill for food, water, bus rides, health-care and primary education that subsidies once covered. This would just shift the fundamental problem off of Table (4D-1) onto another table labeled "External Debts of Developing Nations". This merely postpones the problems currently attributed to Type B globalization.

Now examine Chapter 8 where some options available to the developed world for dealing with Type B globalization are listed and examined. Note that the question of whether the problems listed in Table (4D-1) and Section (3-A) are due to Type B globalization or to Changes (1), (2) and (3) listed above becomes largely irrelevant. Chapter 8's options apply to both answers simultaneously. The problems with Type B globalization merely comprise a subset of a far larger set of problems with globalization's context that cannot be ignored. Until Type B globalization is seen and addressed in these terms, none of these problems will ever go away.

Go to the Table of Contents of this entire document (Top of Chapter 1)
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Go to top of Chapter 4 in this file ~ Effects of, and Responses to, Convergence ~
Go to top of Chapter 5 ~ Financial Capital Constraints on Convergence ~ (top of the third file of this document)
Go to top of Chapter 6 ~ Natural Capital Constraints on Convergence ~
Go to top of Chapter 7 ~ The Convergence Point ~
Go to top of Chapter 8 ~ Strategies for Living with Convergence ~
Go to top of Chapter 9 ~ Politics of Globalization - déjà vu ~
Go to Chapter 10 ~ References ~
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